Top five reasons to buy Thai stocks

By BRIAN HOEGEE - Bangkok Post

These are just five of many reasons why Thailand is an attractive market at current levels. On the flip side, if global institutional exposure to sub-prime mortgages is the main reason for recent market volatility; wouldn't it make sense to invest in countries that have sold off sharply yet have little or no exposure to sub-prime mortgages?

All you have to do is turn on the TV or read the newspaper and you will hear nothing but negative news relating to sub-prime mortgages in the States, central banks intervening and volatility that has been unmatched in recent years. No stock, currency, debt or commodity market has been spared the mayhem; some have thrown in the towel, others have chosen to stay on the sidelines due to the tremendous volatility even if there is money to be made.

The Dow Jones hit a high on July 17 while the SET Index hit a cyclical high only nine days later. From mid-July to the recent August lows, the SET Index corrected by more than 11% and the Dow is off more than 6%. Investor psychology has gone from euphoria and greed to panic and fear thinking that the worst is yet to come. Volatility will most likely continue and in times of doubt, disbelief and exhaustion, such as now, investors should look to move back into the Thai market. Here are five reasons why:

F1. Political Situation: Using logical reasoning, one can come to the conclusion that the constitutional referendum this Sunday should pass and elections should go smoothly before the end of the year. It is somewhat of a risk using the words "logic" and "reason" in the same sentence when mentioning Thai politics. However, the powers that be clearly realise that if the elections do not go smoothly, the economic picture will worsen to levels not seen since the Asian financial crisis. If this criterion is not met, then all bets are off.

F2. Technical Overview: It is clear that the SET Index has broken out of its long term down trend. The breakout occurred in June at the 780 level. This level will act as a huge support against any potential downside movements that may take place in the ensuing days or weeks. For those who follow Fibonacci levels, it just so happens that the 38% retracement (December low of 587 to July high of 895) lies at 778 also. Both the RSI and Stochastic are also at increasingly attractive levels.

F3. Interest Rates: Common sense leads us to believe that when interest rates are low, equities perform well and when interest rates are high, equities perform poorly. Most investors become extremely wary of equities in a rising interest-rate environment. However, rising interest rates can actually be a catalyst for rising stock prices. Interest rates are raised to prevent the economy from overheating and leading to increases in inflation.

An overheated economy is generally a good thing for most companies as earnings are robust and the consumer is spending. The Bank of Thailand may lower rates once more this year and subsequently earnings and the overall economy will rebound going into 2008. As growth kicks in, the central bank will most likely begin to raise rates sometime in 2008 to cool the economy. Contrary to popular belief, stock prices should rise in conjunction with rising rates.

F4. Inflation: One of the main reasons the central bank did not lower interest rates earlier in the year was due to rising inflation. Due to the economic and political issues over the past 12 months, inflation has stabilised and is now hovering at 1.7%. This is a comfortable level and inflation should continue to be tame over the next 12-18 months.

F5. Earnings: Earnings growth has slowed dramatically over the past 12 months due mainly to lacklustre consumer confidence and the political mess. The price/earnings ratio for the SET50 Index is currently at 12.4 and most analysts put the 2008 P/E for the SET50 at 10.5. As central bank interest rate cuts start to filter through and benefit the economy, the consumer will return and corporate earnings will begin to improve in the fourth quarter of 2007.
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Brian Hoegee is Managing Director, Asia, of Global Trader, a leading London-based derivatives provider registered with the Thai SEC. Contact him in Bangkok at 0-2654-1212 or visit http://www.gt247.com