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26 May 2006

Financial Markets

Thai Stock Market, Remainder '06: Hinging on Fresh Foreign Funds


The SET index has plunged by around 10 percent over the past two weeks. This primary gauge closed at 701.03 points on Thursday, May 25, the lowest level in five months, since December 23, 2005, when it closed at 698.95 points. The SET index has pared its gains seen earlier this year, losing 1.78 percent from the closing level at 2005 year-end. This sharp plummet could be attributed to continued net selling of foreign investors, totaling as much as around THB33.5 billion over the past two weeks. (As a result, the net position of foreign investors at the beginning of this year to May 25 is still positive with buying totaling THB81.8 billion.) Still, the Thai stock market has not been the only casualty of portfolio adjustments among overseas investors. Around the globe, other stock markets have also been bearish. The sharp gains seen earlier this year in the stock markets of several countries led to heavy profit-taking by foreign funds last week. Shifts of funds to lower-risk bond markets, and purchases of such IPO offerings with large capitalization as the Bank of China and Thai Beverages were also to blame for the global corrections.

Looking ahead, KASIKORN RESEARCH CENTER (KResearch) is of the view that fresh fund inflows to the Asian region over the remainder of this year are likely to be seen given the US economic slowdown and the weakening US Dollar. The upbeat Chinese economic growth and the likelihood of the Japanese economic revival will also serve as supportive factors for regional currencies and stock markets, alike. However, the extent of the new fund inflows to the local bourse, and whether or not Thai shares will fare better than what was seen last year might depend on numerous factors.

From the second quarter onwards, the Thai stock market may be supported by the following favorable factors:
  1. The oversold Thai shares may attract foreign investors to return to the Thai market thanks to their low prices. Looking regionally, the P/E ratio of the Thai stock is comparatively low with quite attractive dividend yield.
  2. Negative factors related to the Thai economy have been priced into the market somewhat. If such negative impacts are not excessive, the downside risk of the SET index will likely be limited.
  3. If other related factors improve, the SET index is likely to rebound during the rest of this year. These include the general election that will lead to the forming of the new government by the final quarter of this year, lower-than-expected hikes in oil prices and the inflation rate, and slight increases in interest rates by commercial banks plus impressive exports, the expected primary driver for economic growth.

However, foreign buying may be restricted by concern about Thai economic fundamentals. Firstly, economic growth during the remainder of this year is projected to slow. KResearch expects a decrease of 5.3 percent in Q1/2006 to 3.5-4.5 percent for the remaining quarters of this year. Secondly, domestic political uncertainties will affect disbursements from the government budget, as well as investments in government mega-projects and affect investor confidence internally and externally. Thirdly, the strengthening Baht will ease during the remainder of this year, following a significant appreciation over other major regional currencies, recently. The anticipated economic setback will flatten the curve on Baht value, and erode appetites for the Thai stock market. Lastly, the continual rise in oil and other consumer goods prices will have an impact on production costs of listed companies and on corporate gains.

The SET index is set to rebound, driven in part by new inflows of funds; however, KResearch projects volatility in the index, which is under pressure by fund mobilization, where buying on weakness will exist alongside with profit-taking. Thai economic fundamentals ? a key factor for investment by foreign investors ? have been dampened by the above-mentioned uncertainties, and this will diminish long-term investments by foreign investors. However, the index at the end of this year will be able to close at 795 points if all positive factors meet expectations.

Financial Markets