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23 Jan 2009

Financial Markets

Mutual Funds, 2009: Challenged by Recession and Falling Interest Rates (Current Issue No.2136)

The mutual fund industry, plagued with economic risks at home and abroad, has experienced a 4.80-percent contraction in net asset value (NAV) to total THB1.53 trillion, down from THB1.61 trillion at the 2007 year-end. Some 1,105 new funds were launched in 2008. The slowdown is largely attributed to domestic factors, i.e., political uncertainty, the airport seizures by anti-government protesters and the economic downturn that harmed foreign investors' sentiment. Other downsides include external factors, most especially the deepening global crisis that has plunged advanced economies into recession in 2009, plus global financial market volatility and increased credit risks that may lead to greater caution in investment overall.
The 2009 is expected to be a challenging year for the mutual fund industry. Most asset management companies are adopting cautious stances in their business operations. Among the key factors this year will be the global recession, plus volatile financial markets worldwide that have bitten into consumer spending and savings. As investors become more risk-averse amid market volatility, the mutual fund business will be affected. Overall, the downward interest rate trend should be positive to investment in fixed-income funds given rising bond prices. Nonetheless, the possible low and flat yield curve expected in 1H09 may make fixed-income funds less attractive due to a narrower gap between return on investment of fixed-income funds and deposit rates. In addition, other factors include the forthcoming redemption of some foreign investment funds (FIF), especially those focusing on South Korean government bonds that will reach maturity this year. If asset management companies fail to fill the gap left vacant by these maturing funds, NAVs will inevitably be affected. Meanwhile, the maximum income tax deductions on Retirement Mutual Funds (RMFs) and Long-term Equity Funds (LTFs) have been retrenched at THB500,000 this year from THB700,000 applied during the last three months of last year. Most asset management companies still see some room to expand in the RMF and LTF market in 2009, especially if customers' holdings of these funds have yet reached their tax break limits. Amid the economic downturn, fixed-income funds, funds focusing on private debentures and equity funds in which investments are earmarked for high-dividend shares may remain appealing to investors this year.

For investments in mutual funds in 2009, savers should monitor related news and developments closely amid the prevailing economic crisis, then prioritize investment preferences vis-à-vis their risk appetite, and seek the right timing for making investments.

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Financial Markets