Coming off a bull run

Thainox and SET executives sound a gong to mark the highly anticipated trading debut in December of Southeast Asia's largest stainless steel maker

Was 2004 a lost year for the capital market? After all, corporate earnings over the first nine months are up nearly 40% from 2003. Economic growth remains relatively robust at 6%, with exports at record highs and investment picking up steadily.

But such positives have failed to translate into gains for the Stock Exchange of Thailand, with the main index down over 15% from the beginning of the year to December. Certainly coming off the bull run of 2003, when the SET was the world's best-performing market with a 116% gain, 2004 has been a disappointment for many investors hopeful of a sustained pickup in the market cycle.

Blame has fallen on any number of factors _ rising inflation and interest rates, political uncertainties ahead of the general election, the violence in the South, oil price volatility and the bird flu outbreak. All are themes that are expected to continue through 2005. Couple these market risks with expectations of slowing domestic and global economic growth and it is understandable why more than a few investors might look to the new year with scepticism over future prospects.



Yet optimists _ and government policymakers _ would say that 2004 was an aberration, a period where unforeseen circumstances came together to stall what was otherwise expected to be another year of steady growth for the Thai capital market.

The factors pointing to continued growth are varied. For one, the pickup in private investment will mean plenty of activity in the primary market, as companies seek to raise the funds needed for boosting production capacity. With bond yields and bank interest rates set to rise in 2005, more than a few companies are expected to look to the equities market to raise capital for expansion.

The privatisation of state enterprises, which saw Airports of Thailand, MCOT and Thai Oil enter the SET in 2004, is set to continue in the new year, led by some of the country's largest utilities _ the Electricity Generating Authority of Thailand, TOT Corp and CAT Telecom, as well as the electricity and water utilities. Government plans to spend hundreds of billions of baht on new roads, mass transit systems and utilities infrastructure will also add an additional boost to the market, although details on the projects remain uncertain heading into the beginning of 2005.

And policies aimed at boosting the country's long-term savings pool also bodes well for the market. In 2004, authorities approved a new fund class, long-term equity funds, offering personal income tax deductions of up to 300,000 baht per year for investors holding their investments for at least five calendar years. For 2005, regulators are looking at how to extend the programme through increased tax incentives for life insurance or compulsory provident funds, two initiatives that would considerably expand the size of the country's long-term savings base and the role of institutional investors in the capital market.

The introduction of a limited insurance deposit programme starting in 2005 also has implications for the capital market. With bank deposits no longer enjoying blanket guarantees from the government, fund managers anticipate a considerable shift in assets towards the capital market.

Adisorn Sermchaiwong, head of the Association of Investment Management Companies, believes 2005 should see a boom in demand for advisory and financial planning services.

Even with increasing market volatility and risk, upside gains of 5-10% on equities were well within reach, he said, although investors should look to companies with solid dividend performance to cap their risk.
While the decline in stock valuations in 2004 has hit portfolio values, the overall asset management industry continued to rise steadily throughout the year, with assets under management of around 330 billion baht at the end of October, up 6-7% from the year before, and are expected to reach 400 billion by the end of 2004.

On the supply side, the first 10 months of 2004 saw 25 new companies enter the SET, compared with 21 for all of 2003 and 18 in 2002. Activity in the smaller Market for Alternative Investment was even greater, with 11 new listings from January to October, compared with six in all of 2003. And while the SET's market capitalisation at the end of 2004, projected at 4.3 trillion baht, will fall below the 4.8 Continued on Page 22

Maintaining balanced growth
in a period of change

KITTIRATT NA Ranong leans back in his chair, a thoughtful look on his brow. "It's an interesting time right now, no question. The next several years will be a period of change, both in Thailand and around the world," says the president of the Stock Exchange of Thailand.

The twin deficits in the United States. Slowing growth in China. The expansion of the European Union. Trade liberalisation and increased economic integration within East Asia. Volatility of the US dollar. Fears of a renewed flare of global terrorism. Mr Kittiratt said that given the uncertainties in the global environment, the main challenge for market regulators now was to ensure that the infrastructure was in place for investors and companies alike to better manage their potential risks. Thailand, with its diversified base of industry, agriculture and services, was now fully established on a growth track, he said.

Mr Kittiratt explains the challenge: "How can we make ourselves more attractive?"

"The year 2005 will see continued expansion of the economy, aided by new investment, fiscal stimulus and domestic consumption," Mr Kittiratt said.

"The key target for the year will be in maintaining balanced growth. But at the same time, we need to be cautious, and identify and the potential risks that face policymakers and companies alike."

For the SET, the prospect of growing volatility in the international economy only adds greater urgency to the need to ensure that market infrastructure is prepared to service investor needs. Over the past 12 months, authorities have made steady progress in expanding the range of products and services available on the SET to include fixed-income instruments and pave the way for the launch of futures and derivatives in 2005.

Retail investors first gained direct access to opportunities to trade in debt instruments in late 2003, when the SET launched its Bond Electronic Exchange. As of early December, 38 issues worth a total of 182.8 billion baht were traded on the exchange.

The year 2005 will mark another milestone for the development of the Thai capital market, with the launch of the new futures market and derivative products.

Mr Kittiratt said such developments were a natural progression of the SET's policy to offer a fully integrated array of financial products and services to issuers and investors alike.

"If you don't have derivatives, how can you manage risk? Investors are limited to only taking long positions," he said. "For the bond market, our objective with the BEX is to allow a point of entry for retail investors. The Thai Bond Dealing Centre will continue to be the focal point for institutions, while the BEX will service retail investors. While volumes now might be small, the demand is there."

Mr Kittiratt said the capital market had made considerable strides over the past several years to broaden and deepen capabilities and services.

"Over the past 30 years, when compared to other markets, I don't think that we are behind anyone," he said with confidence.

Over the past three decades, the SET has slowly shifted its role from a service provider to being a developer and initiator, whether in terms of support for improving corporate governance, investor education initiatives or the development of new financial products.

Authorities now take a holistic approach to market development, working together with other stakeholders _ analysts, investors and listed companies _ to help further development goals for the market under a single, unified direction.

Mr Kittiratt said 2005 would see the SET continue with its efforts to educate investors about the Thai market, both locally and abroad.

"How can we encourage foreign inflows and keep funds in the country? The valuation for the SET is still behind that of other regional markets," he said. "So the question is, how can we make ourselves more attractive? We need to build better understanding among the global investment community about Thailand."
Locally, the SET has taken a more long-term approach, with a heavy focus on youth education to help build up the next generation of investors. Activities such as investment fairs, educational books and "edutainment" programmes are all set to increase in 2005.

Investment advisers and securities professionals similarly need to upgrade their skills in preparation for future changes.

"There are some 5,000 people trained to handle equity sales. But are they all ready to trade bonds? We need to continuously upgrade skill sets within the securities community and prepare for the launch of the derivatives market," Mr Kittiratt said.

The Thailand Futures Exchange is expected to start operations in the second half of 2005 with the launch of index futures, and then later to expand to futures and options based on interest rates, currency rates, commodities such as gold and oil and other instruments.

"To be a good market, the products needs to be good and the buyers need to understand the risks and opportunities available. We are working for both sides," Mr Kittiratt said.

"With every day, every week, we move forward another step."
_ CHIRATAS NIVATPUMIN trillion recorded the previous year, authorities remain confident that long-term growth trends remain intact, particularly when considering the number of new listings in the pipeline.
According to Sopawadee Lertmanaschai, the chairwoman of the Capital Market Opportunity Centre, market capitalisation was expected to rise to at least five trillion baht in 2005.

This could prove to be a modest goal, in fact, given that the exchange believes that up to 100 new companies could enter the SET and MAI in the new year. Much of the growth will likely be in the smaller MAI, which under newly appointed president Vichate Tantiwanich, has committed to taking a more pro-active approach to attracting companies to list, including working with local trade groups, financial institutions and advisory companies to help new companies prepare for the rigours of going public.

Considering that over 190,000 small and medium-sized enterprises operate nationwide, the MAI sees its listing target of 40-50 in 2005 to be quite realistic and achievable, although sceptics might argue that market authorities have consistently been overoptimistic about listing targets for the past several years.

But Ms Sopawadee said the fact that corporate earnings had continued to grow strongly in 2004 despite various "domestic problems" boded well for the market overall.

Tax incentives for newly listed companies would also help encourage market growth, she added.
Companies listing on the SET or the MAI by the end of 2005 will qualify for a special 25% corporate tax rate, compared with the normal 30% rate, while MAI-listed firms with paid-up capital of less than 300 million baht will receive an even more favourable 20% rate.

On the demand side, authorities say they will continue to focus on investor education through initiatives such as the popular SET in the City exhibition, provincial roadshows and student education initiatives.

New catalysts needed to drive the market

"Thai companies are much better managed than in the past. And many are paying quite sizeable dividends," says Mr Stotz

STRONG CORPORATE growth has been the main driver of the Stock Exchange of Thailand over the past several years. Nine-month profits for listed companies were nearly 315 billion baht, or 39% higher than the year before.

But what will be the driver going forward, asks Andrew Stotz, head of research at Macquarie Securities.
"At some point, margins can't expand any further, and at that point, growth slows," he said.
Bottom-line profits in 2005 will come under additional pressure as many companies will see higher tax burdens as deductions taken on accumulated losses built up during the crisis expire.
"So you combine no more expansion in margins with a full tax rate and you get very flat growth next year," Mr Stotz said.

Thailand still enjoyed a relatively positive position among foreign investors, while local understanding of the market was improving steadily.

"But I think what we have right now is a kind of a lack of catalysts," Mr Stotz said.
The upcoming general election in February will certainly be one factor closely watched by local and foreign investors alike.

"I expect that Prime Minister Thaksin Shinawatra will probably remain in power. And once that happens, I think the market will take it positively, because the factor right now is the uncertainty about whether he will remain, and if so, what will his majority be," Mr Stotz said.

Uncertainties have been a key factor weighing on the market all year, whether it be the handling of the bird flu, or more important, the violence in the South. The high death toll from the violence, particularly the deaths of 85 detainees in Tak Bai in late October, had led many to rethink their view of Thailand's social and political stability, long one of the country's strongest advantages when compared with the rest of the region.
Mr Stotz said he was generally optimistic about the Thai market, although additional drivers were needed to draw foreign investors.

"What Thailand needs is to have a really attractive story for foreigners to jump in," he said, noting that with just 3% of the region's market capitalisation, Thailand still lagged behind Taiwan, Korean, Hong Kong and China.

On the other hand, Thai companies and the market itself had made considerable strides over the past several years.

"If you ask me as an individual or as an investor, Thailand's stock market has several very good attributes. For one, earnings growth, while likely to slow, is still there. Profitability is still very high," Mr Stotz said.
"Thai companies are much better managed than in the past. And many are paying quite sizeable dividends. My estimate is a dividend yield of 4% or so in [2005]. When you consider you put money in the bank, and you get 1%, that's not a bad pickup."

Local investors should consider how to position themselves to take advantage of any pickup in foreign investment.

"It's a question of where can I position myself. ... Foreign funds have not been that involved in Thailand, and so the Thai market has had a very difficult time growing up," Mr Stotz said.