Economic Mid-Year 2001

Punters still singing
bear market blues

Krissana Parnsoonthorn

STOCK MARKET

Despite moves by regulators to revise laws and regulations to provide flexibility for listed companies and encourage new products on the stock exchange, foreign portfolio investors shifted theirmoney to, other performing exchanges. Fears over the global economic slowdown, especially in the US and Japan, which were expected to adversely affect the
Thai economy, encouraged negative
sentiment in the market

Thai capital markets got a lot of policy support from the government during the first half of this year, but negative factors, including political uncertainty at home and the global economic slowdown, undermined recovery.

Many analysts agree that the Stock Exchange of Thailand remains a bear market with foreign portfolio investors shifting their money to the other performing exchanges.

This reflected Thailand's declining weightings in the MSCI indices, further reducing the country's attractiveness to international investors.

High oil prices, the weak baht, political jitters and slowing economic growth fuelled optimism among stock investors.

But fears over the global economic slowdown, especially in the US and Japan, which were expected to adversely affect the Thai economy, also boosted negative sentiment in the market.

Although four interest rate cuts were imposed by the US Federal Reserve to spur economic activities, the outlook for the US economy was still gloomy. The heavy sell-off of Nasdaq technology stocks is likely to hurt Thai exports, particularly in the electronic and electrical components sector.

While analysts forecast there was not much further for the SET index to fall, the stock market made a 16.72% gain in value from the end of last year to mid-June.

The SET index reached its peak during the first half of the year at 339.68 points on Jan 25 while its low was 272.03 points on Jan 3. Market capitalisation as of mid-June was 1.52 trillion baht and average daily turnover stood at 7.02 billion baht.

Even as the Thai Rak Thai Party formed its cabinet, stock prices did not make a rally.

The benchmark index stayed in a range of 250-350 points during the first six months of the year.

After Prime Minister Thaksin Shinawatra took office earlier this year, the government made reviving the stock market as one of its priorities.

At the end of March, it rolled out numerous measures including a reduction in corporate tax, eased disclosure and accounting regulations and an accelerated programme for state enterprise privatisation to boost the equities market.

Sixteen state enterprises are to be privatised by 2003. In the second half, authorities hope to list or increase public share ownership of Internet Thailand, Thai Airways International, Bangchak, Krung Thai Bank and th Petroleum Authority of Thailand, assuming favourable market conditions.

Revisions will allow firms greate flexibility in setting their stock par value, issuing stock dividends and treasury stocks.

Authorities claim the measures have been put in place to lay the groundwork for the local bourse in the long term.

Companies entering the market would enjoy a special 25% corporate tax rate for five years after listing on the stock exchange.

For smaller firms entering the Market for Alternative Investment, a 20%tax rate would be offered for five years. Both tax breaks would be effective over a three-year application programme, expected to start this year.

At the same time, companies already-listed would be subject to a 25% tax rate for the first 300 million baht of gross profits. The extra profits beyond the ceiling would be taxed at 30%.

Prime Minister Thaksin said that the new listings of four potential state enterprises this year would increase the market's capitalisation by 83.65 billion baht.

The four state enterprises are Internet (Thailand), Thai Airways International, the Petroleum Authority of Thailand and Krung Thai Bank.

The PTT has already announced its plan to mobilise US$600 million from the stock market this year. The PTT share float is expected to be the largest in the history of the SET.

This year saw only one listing, CalComp Electronics (Thailand), in January. The electronic components maker made a poor debut, ending at 24.75 baht or 5.25 baht off its initial public offering price.

Trading on the MAI, the SET's sister exchange, had not been active with no securities listed on its board until now. However, the Brooker Group is expected to be the first listing after it won approval to sell IPO shares next month.

While interest rates had stayed low to boost investments and support debt restructuring, domestic consumption did not increase much.

Thai Rak Thai's aggressive spending programmes such as village funds, debt-suspension for farmers, and medical fees at 30 baht per visit were likely to lead to a deterioration in the country's fiscal position and increase public debt.

Although interest rates were low, some corporate companies such as Nation Multimedia, Cal-comp, and Siam Panich Leasing raised additional funds through debenture issues.

Regulators at the SET and the Securities and Exchange Commission stepped up moves to revise laws and regulations to provide flexibility for listed companies and encourage new products on the stock exchange.

The draft trustee law would enable convenient processing of the issue of debentures and stock options for directors and employees, as well as for companies undergoing securitisation.

To develop the debt market, the amendment of the securitisation law was approved to allow the establishment of special-purpose vehicles (SPVs) with a multi-tiered structure.

This will protect investors who buy securities from the last SPVs who carry out securitisation when loan originators are bankrupt.

As well, secured loans and future receivables could be securitised. This would encourage securitisation of a range of items from municipal household taxes to electricity bills and trade receivables.

Securitisation involves acquiring and grouping together several financial instruments, housing loans for example, and dividing them into equal-sized investment units that can be traded like stocks.

Trading of non-voting depositary receipts began early June but it failed to attract foreign investors as stock prices on the foreign board have only small premiums.

NVDRs, having similar financial benefits as common stocks but lacking voting rights, are new channels to -allow foreign investors to invest in Thai stocks beyond the foreign ownership limits.

Investment fund managers urged policy makers to delay the launch of Exchange Traded Funds, saying they were not ready for overseas investment and some conditions needed to be revised for management flexibility.

The free float requirement at 10% for listed companies was a hot issue during the first half of the year, given the lowering of Thailand's weightings in benchmark indices. The revisions related to encouraging the free float of shares. About 100 Thai stocks currently fall short of a 10% free float.

The SET and the Association of Listed Companies reached a conclusion by mid-June to include institutional investors like mutual funds, who do not get involved in the daily management as minor shareholders to help raise the free-float percentage immediately.

The case of BankThai, which was among stocks with low liquidity and a free float, made newspaper headlines as its shares were targets of irregular trading and went up sharply to peak at 51 baht in early May.

Officials investigating the irregular transactions of BankThai shares said they found evidence that Yuanta Securities had supported the activity.

The SET ordered an indefinite suspension of Yuanta's trading licence until the brokerage could improve its internal control system.

This incident led to the resignation of Yuanta's managing director Somphote Ahu-nai. Yuanta resumed trading activities after just five business days.

Apart from the BankThai case, stocks of The Cogeneration, Royal Orchid Hotel and Muramoto Electronics also made unusual gains and the cases are now under investigation.

The SET will have a big change in its top management soon. SET chairman Amaret Sila-on's second consecutive two-year term expired at the end of July. Chavalit Thanachanan, chairman of Bank of Asia, Post Publishing and Bangkok Life Assurance, is likely to be appointed to succeed him.

After the liberalisation of brokerage fees, regular commissions stand at 0.25%. But some securities brokerages came up with a zero rate to tap more investors. Online stock trading via the network of settrade.com began early this year.

Amid the fierce competition, Trinity Securities Group headed by Pakawat Kovitvathanaphong, launched its operations in March.

Two securities firms, Yuanta Securities and Kim-Eng Securities, are also considering a merger after their parent firms made a partnership agreement in Singapore.

SET efforts to improve the quality of investors was also reflected in the, staging of the Investor Fair, which was held between June 8 and 12 at Bitec.

The fair had the objective of educating people and providing information about the best way of investing in the stock market, although the number of visitors fell below expectations.