LTF inflows collapse on weak incentives
Fund inflows channelling into long-term equity funds (LTFs) during the first 10 months fell drastically by more than 5 billion baht compared with last year's corresponding period as the economic slowdown and subdued equity returns have dampened incentives, says Morningstar Thailand.
The final quarter usually sees huge influxes of capital in investment funds, with investment incentives centred on tax deductions and long-term savings.
Previous research by Morningstar Thailand found around 30 billion baht was invested in these funds during the last few months of every year to catch a final chance of tax benefits.
This may no longer be typical, found the firm.
Inflows into LTFs from January to October logged around 3.8 billion baht, down from 8 billion registered during the first 10 months of 2018, said Chayanee Juengmanon, senior research analyst at Morningstar Thailand.
Lower capital inflows can be attributed the economic slowdown leading to earnings of SET-listed firms to decline in the third quarter, with the US-China trade war another factor derailing confidence, said Ms Chayanee.
Net outflows from LTFs tallied around 7.6 billion baht for the first 10 months, according to Morningstar Thailand.
"Investors are quite worried about market conditions, especially how the economic slowdown has caused returns from equity investment to dip from last year," she said.
"The stock market has seen volatility throughout the year. For the first half, market participants expected the Federal Reserve to raise interest rates as the US economy is expected to recover. Global interest rates have been on a decline during the second half, while capital outflows continue to be seen in emerging markets."
Tax benefits for LTF investment are set to end this year as the government will establish a new type of mutual fund to replace LTFs, dubbed the Sustainable Equity Fund.
Paiboon Nalinthrangkurn, chairman of the Federation of Thai Capital Market Organizations, said he disagreed with the ministry's plan to set the maximum for combined tax-deductible contributions for the new tax-saving fund and retirement mutual funds (RMFs) at 500,000 baht per taxpayer per year.
If tax-deductible contributions into a new tax-saving fund are bundled with those from RMFs, flows from LTF investment of about 50 billion baht a year to the Thai stock market could be reduced by more than a half. This will adversely affect the bourse, said Mr Paiboon.
Piyapat Patarapuvadol, vice-president for research and asset allocation department at Yuanta Securities Thailand, said returns generated from LTF and RMF investment have been muted this year on the back of minimal SET index returns as the bourse hovers below 1,600 points.
A passive investment strategy is ideal for volatile stock market conditions, said Mr Piyapat.
Normally, LTF and RMF investments generate an average of around 5-10% per year after the units are invested in for 5-10 years.
"Investors are still assessing the stock market because it has performed poorly with recurring volatility," he said.