Offshore money gets bullish about Thailand stock market

I OUTLINED the bullish case for Thai equities two weeks ago in this column when Bangkok’s SET Index was 760 points. The index has surged 8 per cent to 830 now making Thailand the best performing stock market in Southeast Asia in the last two weeks.

By Martein Khalid (Money Maze)

Published: Mon 9 Jul 2007, 9:05 AM

Last updated: Sat 4 Apr 2015, 10:17 PM

Of course, the catalyst for the latest surge in Bangkok was the prospect of elections and a junta’s handover of power to a civilian government now that the Constitutional Court has banned Thaksin and Thai Rak Thai. Of course, social unrest is possible since more than a hundred TRT politicians were also banned by the military regime and the high command’s favourite Democrat Party does not exactly enjoy strong public support. Of course, the next landmark political data point in Thailand will be the referendum on 19 August as a prelude to the general elections in December 2007. Offshore money has turned bullish on Thai shares, driven up the SET index 5 per cent last week alone. This bullish sentiment stems not just about perceived reduction in political risk but also new portfolio allocation to Southeast Asia’s deepest value market and the central bank’s monetary stimulus. Can Thai shares move higher? Sure. After all, foreign money bought $3 billion in the whole of 2005 and 2006 – but invested another $3 billion in the kingdom in the past week alone. This proves that Bangkok witnessed a selling panic on dedicated emerging market fund managers. This desperation not to be caught underweight when El Torro roared accounted for the 2 per cent surge on Monday and Tuesday on the SET.

So far, the rally in Thai shares has been led by foreign investors. But if Thailand’s baht mutual funds or the Government Pension Fund (long only 20 per cent in Thai equities) begin to deploy their 400 billion bahts of investible assets, Thailand could become the next hot bull market of ASEAN. It is cheap if no longer underowned and unloved.

The SP500 dropped almost 2 per cent in June 2007 as the bellwether US Treasury bond remained above 5 per cent, Brent crude oil surged above $75, terrorist event risk was highlighted by the British foiled bomb plots and the Pakistani mosque siege and the subprime mortgage fiasco cast a long shadow on corporate credit spreads on Wall Street. Could the summer of 2007 prove as toxic as the summer of 2006? I doubt it.

The global market woes in 2006 were a response to the May CPI report and the fear of higher inflation and a Fed tightening. However, I find it surreal that the financial markets are obsessed by a Fed tightening while the subprime mortgage securities market triggers a mini – credit crunch, driving up junk bond and corporate risk spreads, threatening a rating agency downgrade of $200 billion in bank and insurance company owned CDO’s, making it impossible to finance LBO’s and private equity deals on terms that were routine before June. The real Fed Funds rate, adjusted for inflation, is 3 per cent. Monetary policy is far too tight at a time when America faces a property recession, when the National Index of Home Builders index is at a 16 year low, when foreclosures and inventory unsavory of unsold holds are at 4.3 million units. The leveraged American consumer is faced with higher prices for food, corn, gasoline and mortgages. In essence, housing is the ultimate leading indicator of an American economy, and economic downturn is imminent in 12 -18 month. This is exactly what happened in 1988 – 90 when an inverted yield curve, a real estate slump, a credit crunch on Wall Street and an oil shock after Saddam’s invasion of Kuwait combined to push the American economy into recession. Ben Bernanke knows the history of the financial markets, recognises the grim silhouette of deflation when he sees it in the economic data. There is just no way the Federal Reserve Board can even think of raising interest rates when financial markets face a mini — credit crunch, consumer spending is decelerating and another 20 per cent hit in US real estate prices is possible as higher yields take their toll. The age of the condo flipper is dead and gone in Miami, if the message of leverage and risk is not well understood by the flat flipper brigade of Dubai Marina. Mark my words: the FOMC will cut interest rates by December as the real estate Black Death claims its victims.

Nonfarm payrolls in June once again reinforced the Goldilocks scenario, even though the bond market bid up yields across the curve. While the job market is robust, Conference Board staffing surveys and help wanted ads suggest that the job market could soften in the future. For now, Treasury bond yields of 5.25 per cent-5.30 per cent seem inevitable. Construction, mortgage finance, homebuilding, retail, small business are all a basket case, even if the pain is not reflected in the jobs data yet.

Deep value shares with minimal downside risk make sense at a time when crude oil, Treasury bond yields and earnings season volatility could prove a headwind for the SP500 index. Pfizer (PFE) trades at a dirt cheap valuation of 12 times earnings as the capital markets have been skeptical about this Big Pharma’s growth prospects. But Pfizer’s new CEO has now initiated a restructuring, will use the $ 28 billion cash to accelerate share buybacks and has received FDA approval for several billion dollar products out of its 150 drug pipeline. Sure, Pfizer at 30 could prove a long wait but at least we get a 4.3 per cent dividend yield while we wait.

UBS has fired its CEO Peter Wuffli after a series of losses in fixed income trading and closure of its Dillon Read internal hedge fund. At 74 Swiss francs, I believe the bank is the world’s leading wealth management franchise with a profitable commercial bank and securities firm UBS trades at only 13 times earnings but its EPS growth is less volatile than several of Europe’s leading investment banks. Now that Marcel Rohmer, the head of wealth management, has been appointed CEO, UBS will probably accelerate the global scale of its private bank.

Oracle below 20 has potential 20 per cent upside. A strategy that has worked well for me is to sell the September 19 calls, picking up $50 per contract where the worst case scenario is to be delivered ORCL at 18.50. Larry Ellison’s software colossus is a quintessential Valley deep value play at 14 times forward earnings and its new database product shall drive licence revenue and growth. I even believe Microsoft is cheap at 21 times earnings as its seeks to leverage its dominance in the Windows operating system and Office software suite into Web centric software and media. The Xbox console, Windows Mobile, Windows Media Center and the IP TV platform are all significant growth engines of the future. The Evil Empire of MSFT is a deep value play dissed by the Street. As Papa Prem observes on large cap teen, sell putty, be happy!

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