Markets & Investing

A bull run against all odds

Politics was uncertain. Growth was modest. Consumer consumption declined. And the US sub-prime crisis lingered. With these negative factors hurting investment sentiment, the Thai stock market managed to rise 23% in 2007.

Elections held the key to the rally in 2007. The SET began its ascent when the poll date was fixed, before closing the year up 24%, at 843.28 points as of Christmas Day 2007.

Despite the strong gains, investors could not help but feel they'd been riding a roller coaster because the ascent had not been exactly smooth as silk. One negative factor after another, both at home and abroad, kept hitting the market, threatening to knock the fledgling climb off course.

Analysts agreed that the main factor contributing to the market rise was foreign capital inflow, which was even smaller than the year before. Moreover, Thai stocks were considered relatively cheap when compared to their regional peers, given the price-to-earning ratio of 11-12 times.

During the first half of the year, the Stock Exchange of Thailand (SET), the laggard in Asia, moved at a snail's pace, the lingering impact of the imposition of the 30% capital reserve rule by the Bank of Thailand in late December 2006.

Moreover, the unsettled nominee case related to the Shin Corp-Temasek share sale and the revised Foreign Business Act were shaking confidence of foreigners investing in Thailand.

Private investment, meanwhile, was at a stand-still, as several investors have delayed new projects and expansion plans in face of political instability. The Surayud Chualanont-led government itself was busy dealing with legal reforms and did a little to spur economic activities.

Then, out of the blue, the SET index ticked up in the second half, soaring 24% to close at 843.28 points as of Dec 25, 2007. The lowest level was 616.75 points on Jan 9 and the highest was 915.03 points on Oct 29.

The clouds seemed to have lifted when the election date was fixed on Dec 23, and the case of PTT delisting was finalised with the court ruling in favour of the energy giant. PTT survived an effort by consumer groups to delist it but its gas-pipeline assets would be transferred back to the state.

The SET's market capitalisation rose to 6.52 trillion baht as of Dec 25 from 5.08 trillion baht at the end of 2006. Twelve companies were added to the stock markets in 2007, spreading equally between the main board and the Market for Alternative Investment (MAI). Among 476 listed companies on the SET, the average dividend yield was 3.46%.

The MAI outperformed the main board and its index gained 35.75% to close at 266.97 points as of Dec 21, 2007, after hitting the year's high of 306.64 points on Oct 22 and the low of 175.61 points on Jan 9.

Market capitalisation of the MAI stood at 36.89 billion baht on Dec 21, 2007, up from 21.81 billion baht at the end of 2006. There were a total of 48 listed companies on the small board.
Total Access Communication or DTAC made the first dual listing ever on the SET after it had been listed on Singapore stock exchange for years.

In 2007, the new highlighted product was ThaiDex SET50, the country's first equity exchange-traded fund launched on Sept 6, using SET50 as the benchmark index. The SET hopes to build up the asset sizes of TDEX, as w9ell as ETFs in other exchanges in the years to come.
One Asset Management manages TDEX, along with its consortium of six companies led by KGI Securities. Three months after the launch, TDEX has proved to be quite popular with its unit price rising to 6.10 to 6.30 baht from its initial public offering price of 5.58 baht.

But in 2007, the local bond market, hit hard by the 30% capital reserve rule, was lacklustre. The proportion of non-resident investors dropped to only 1% compared to 15% before the imposition of the new rule, leaving only commercial banks and local institutional investors as key players.
The US sub-prime fallout also increased costs for local companies looking to issue debt instruments offshore, as bond yields could be pushed up due to perceived higher risks.

Trade in the Bond Electronic Exchange (BEX) remained small in 2007. Retail investors were less than keen to invest in bonds despite the BEX's efforts to urge market dealers to promote more transactions through electronic trading. In a bid to boost activity, the market asked the central bank and the Thai Bond Market Association to transfer government and state-enterprise bonds to list on it but trading volume has remained low.

On the contrary, the country's fledgling derivatives market, the Thailand Futures Exchange (TFEX), achieved its trading target of 5,000 contracts per day, 20 months after opening. It is viewed as the area of high growth and potential for the capital markets.

The TFEX started out with SET50 index futures, which come in four series. The second product was SET50 index options, which was introduced on Oct 29.

The new products to be launched next year are stock options and bond yields, with a full range of products to be offered over the next five years. To increase activity further, additional brokers will also be recruited next year and more educational and training programmes held to familiarise investors with the products.

Meanwhile, its forerunner, the Agricultural Futures Exchange of Thailand (AFET), demonstrated only marginal growth, with trading volume of 500 contracts a day, or half its target.

Even though the bourse had six products, only the ribbed smoked rubber sheets No.3 was popular, while the other five products - white rice 5%, standard Thai rubber 20, tapioca starch premium grade, latex, and tapioca chip - attracted only lukewarm interest. The number of brokers providing trading services on the market also dropped to nine by the end of 2007 from 16 early in the year.

One obstacle is said to be the government's price-intervention schemes for most agribusiness products such as rice, distorting their prices and market mechanisms.

Not surprisingly, the three-year-old AFET still has to rely on the Ministry of Commerce's budget of around 150 to 200 million baht per year to stay afloat.

Napaporn Kurupasutachai, the AFET's acting president, said one of products with high growth potential was tapioca chip. The market is also considering adding a new product, Thai jasmine rice, next year. It will also expand trading hours for 45 minutes, from 3pm to 3.45 pm, and reduce the tick of the ribbed smoked rubber sheet No. 3 to five satang from 10 satang next year to boost trading liquidity.

CHALLENGES AHEAD
Analysts and SET executives agreed that the stock market would be more volatile next year as the unsolved sub-prime crisis, which would slow the US economy further, would continue to put pressure on market sentiment this year.

However, foreign fund managers will still have their eyes on Asia, where robust growth is led by China and India, as investments in the region will continue to generate higher returns than those in US-dollar assets and the Thai bourse will benefit from the foreign inflow.

At home, the sentiment will improve drastically after an elected government is formed, possibly in early 2008. Consumers are expected to resume their spending and industrialists their investments by then.

The newly elected government plans to pour investments into a number of infrastructural projects, particularly Bangkok's new mass transit routes, to boost economic activities next year. Some analysts are optimistic that the SET index could reach 1,000 points in 2008.

Patareeya Benjapolchai, the SET president, also aimed high in 2008. It is set to attract 34 new listed companies to both the SET and the MAI, which will raise about 300 billion baht in funds.

Among the major IPOs in 2008 are Esso, Star Refinery, Thai Tap Water Supply and Thai Beverage, the brewer of Chang Beer, which will seek dual listing in Thailand after listing on the SGX.

Daily trading volume is expected to rise to 22 billion baht next year from 18 billion baht in 2007. Some 100,000 trading accounts will be added to the customer base, up from 480,000 currently.
In the face of globalisation, the SET is forced to restructure itself to cope with rising competition from other bourses. The market is preparing to demutualise to boost its efficiency and flexibility to attract both local and foreign investors.

The SET has strengthened its ties with six Asean bourses by co-operating among themselves and linking up their trading systems. The process is projected to be completed in 2015.
Thailand Securities Depository (TSD), a SET subsidiary, is gearing toward T+2 transactions by 2008.

Competition in the brokerage business is getting tougher with commission rates set to be floated by 2010. In the meantime, brokers are diversifying their revenue bases by adding fee-based incomes.

The top three brokers are Kim Eng Securities, with a 7.98% market share, and Phatra Securities and Asia Plus Securities, with 5.74% each.

The bond market will also face greater volatility in 2008 and fixed-income funds could sell off long-term bonds in light of rising interest rates. The gap between short-and long-term bond yields is to widen next year.