The stock market's roller-coaster ride _ huge losses during the economic recession post-1997 and more than a 30% gain since the beginning of this year _ has not enabled investors to recoup outlays made during the boom years.

MARKETS The Stock Exchange of Thailand is working hard to encourage new investors to buy stocks. But there is still a long way to go in achieving long-term sustainable growth in Thai capital markets

However, the recent gains made by the Stock Exchange of Thailand have made it one of the best performing markets in Asia, after South Korea, with the return of foreign investors in force during the first five months of this year.

The SET has worked hard to widen its investor base and encourage new investors, mainly depositors facing record-low interest rates, to shift money into stocks.

In the past, the stock market was fuelled by easy money from the economic boom. Investors bought and sold stocks based on rumours in trading rooms.

After the bubble burst in 1997, the market grew bearish and investor activity was speculative and erratic. At the time, foreigners deserted Thailand and daily trading turnover was very thin.

The SET index plunged to its lowest level, at 207.31 points, on Sept 4, 1998, from 600-plus points in July 1997. At its historical peak in early 1994, the index was hovering around 1,700.

The market began its steady climb upward in late 1998 but many gains were undone, as in markets worldwide, by the events of Sept 11 last year.

But a gain of more than 30% since the beginning of this year brought the SET index up to 424.44 as of June 14, and many market observers believe 500 is achievable by year-end.

About 380-plus listed companies at the end of 1997 saw their balance sheets in the red and many of them have been busy restructuring debts with creditors. Some of them began posting better corporate performances in 2001, following an improvement in the economy.

MARKET DEVELOPMENT

Chavalit Thananchanan (left), chairman of the Stock Exchange of Thailand, hits a traditional gong to mark the first day of trade for shares of iTV Plc on the exchange on March 14 this year.

After the market crash, regulators reacted quickly with a series of development plans to revive the stock market. Many policies have already been implemented to lay the groundwork for long-term sustainable growth in Thai capital markets, but there is still a long way to go.

To draw foreign investors back to the bourse, the Thaksin Shinawatra government has introduced a package of measures to speed up the privatisation of state enterprises, introduce special tax breaks and ease disclosure rules and legal amendments, for example to the Public Companies Act.

Companies that seek a listing on the main board will enjoy a special corporate tax of 25% for five years, compared with the normal 30%. Listed firms on the Market for Alternative Investment, a secondary market for start-ups and smaller-cap businesses, will pay a 20% tax rate.

As well, a long-term master plan to develop the capital markets is being drafted by the relevant authorities.

Two matching funds _ the Thailand Equity Fund and Thailand Opportunities Fund _ were set up last year to mobilise funds from institutional investors to invest in Thai stocks, and in high-potential companies that had undergone debt restructuring.

The stock market reacted positively to the measures. Other supportive factors _ political stability, higher local consumption and the establishment of the Thai Asset Management Corp to deal with non-performing loans in the banking sector _ also helped confirm positive signs of economic recovery and restore investor confidence.

It is, however, still too early to reach any conclusions about the success of the government measures. The stock market has a long way to go in terms of development before it can compete with some other bourses in the region such as Singapore or Hong Kong.

For example, the confidence of overseas investors was dented again in February this year after the California Public Employees' Retirement System (Calpers) decided to exit Thailand, citing a lack of transparency and human right issues. Calpers is the largest pension fund in the United States.

Good corporate governance continues to be a challenge for many listed companies as well as regulators.

The market's image cannot improve substantially, regulators say, until there is universal acceptance of basic governance principles. These include improvements in information disclosure, transparency and accountability of company management to protect minor shareholders and ensure investor confidence.

Investors look at a monitor at the SET in Bangkok on April 17 when the index opened up 5.45 points or 1.43% after a long Songkran holiday weekend.

But companies cite higher costs and a compromised business culture as barriers to the implementation of good governance.

In the long term, the Securities and Exchange Commission wants to see the stock market and debt markets increase their roles as vehicles for raising funds to balance the role of the banking sector, according to SEC secretary-general Prasarn Trairatvorakul.

Currently, 80% of the funds used in business come from banks and finance firms and the rest from the stock and debt markets.

The SET, as a result, has relaxed its rules and regulations to lower the costs of doing business for listed companies.

At the same time, SET president Kittiratt Na Ranong and his executives have actively led marketing campaigns to promote the stock market. The SET is also in the process of being transformed and corporatised into a privately run organisation.

However, both the SET and the SEC have been criticised as being too soft on irregular trading patterns of some popular stocks and for failing to punish wrongdoers.

Still, the potential appeal of the market is being reflected in the number of companies going public or preparing to do so, after a virtual drought of initial public offerings from 1998 to 2000.

Last year, nine companies made IPOs. Among them were Internet Thailand and PTT Plc, two quality state enterprises that were privatised and listed on the SET.

The accelerated listing of state enterprises will provide new products for the stock market. The government has plans to privatise and list 14 enterprises by the end of 2003.

Up to June 13 this year, there have been seven new listings on the main board and the MAI. The SET is looking for 50 new listed companies by the end of the year.

A healthier securities brokerage industry is also expected to help spur the development of the SET. The return of fixed trading commissions at 0.25% in January this year was seen as a setback for the liberalisation of the business, but regulators conceded that the brokerages simply weren't ready for freer competition.

Kittiratt Na Ranong (left), president of the SET, presided over the formal opening of full brokerage service by Bualuang Securities.

When commissions were deregulated in late 2000, a ruinous price war erupted. Many brokerages, facing razor-thin margins, cut back on research and other services. Now that they have been assured of a stable commission base once more, brokerages are expected to start investing some of that revenue in quality research and analysis for investors.

Further consolidation in the brokerage sector is widely expected, even as the number of full brokerage members continues to rise. The SET allowed sub-brokers to apply for brokerage seats earlier this year. The number of brokerage houses is now 33, up from 27 brokers and 10 sub-brokers at the end of 2001.

The corporate performance of listed firms began improving in 2000 after the results of debt restructuring began to bear fruit. Low interest rates also helped companies reduce operating costs.

Sectors such as building materials, property, banking and finance all made gains.

The profits of listed companies in the first quarter of this year totalled 44.5 billion baht, up 13.6 billion baht from the same period last year.

WIDER INVESTOR BASE?

With hard work, the SET has a chance to widen its investor base. By the end of this year, it has set a goal of 400,000 trading accounts, though the target may be far too ambitious for now.

Very few new accounts were opened with securities brokers during the first five months of this year.

At the end of 2001, there were a total of 200,000 trading accounts, of which 50,000 were considered active. The number of active accounts rose to 60,000 in May.

Mr Kittiratt said the SET could hardly attract new investors when many of them still had an insufficient understanding of stock investments and how the market worked.

As a result, it has tried to provide knowledge to young people who would become potential investors when they grow up, he said. Programmes such as SET-JAT, operated with Junior Achievement of Thailand, have drawn a good response.

More IPOs are also seen as a good way to build interest in the SET, but new investors complain that getting access to IPO shares is difficult unless one already has good connections with a broker or underwriter.

Promoting stocks to the general public as a long-term investment is also a challenge. Retail investors, mainly Thais, remain speculators for the most part, buying and selling, frequently on the thinnest rumours, and following the lead of bigger players.

Creating a more patient and sophisticated local investor class could be helped by a recent SEC decision that allows Thai nationals to legally invest money abroad for the first time.

The SEC earlier this year approved five asset management companies to offer foreign investment funds (FIF).

The firms are MFC Asset Management, Ayudhya JF Asset Management, Thai Farmers Asset Management, ING Mutual Funds Management (Thailand) and One Asset Management.

Units of the five FIFs did not sell out during their initial public offerings in May, partly because the baht had appreciated markedly at the time.

As well, the fund managers said, many prospective clients did not fully understand how FIFs could help them diversify risk.

Local asset management firms have heavily promoted investment through mutual funds, but these too have had their ups and downs.

The mutual fund market began in 1992 and grew up alongside the bullish stock market between 1993 and 1996.

The market crash in 1997 caused the mutual fund market to shrink by half and many people retreated to the safety of bank deposits.