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25 May 2007

Financial Markets

Lower Interest Rates, Volatile Stock: Opportunities Abound for Mutual Funds(Current Issue No.1973)

On May 24, 2007, the SET index plunged 1.44 percent to close at 720.72 points in line with other regional markets. That slump could be attributed to former Federal Reserve Chairman Mr. Alan Greenspan's comment warning about the possibility of a sharp correction in the Chinese bourses. In addition, our local stock markets have also come under pressure from spates of domestic factors unfavorable to the investment atmosphere. These inhibitions include lingering political uncertainties since the dissolution of Parliament and military coup last year, as well as investors' mounting concern leading up to the Constitutional Tribunal ruling next week on the dissolution of certain political parties.

Since early this year, consumer confidence and business sentiment have eroded amid domestic uncertainties and the Thai economy has turned sluggish on ebbing investment and domestic consumption. KASIKORN RESEARCH CENTER (KResearch) forecasts that Thai economic growth may decelerate to 3.0 percent in Q1/2007, against 4.2 percent in Q4/2006.

In the midst of these worries, most stock investors have changed their investment behavior, shifting toward other lower-risk assets, including bank deposits or short-term fixed income funds. Deposits at local commercial banks as of the end of April of this year had grown 3.0 percent over the end of last year. Deposits of some maturities remain high despite lower deposit rates following cuts in the policy rate by the Bank of Thailand. But, at the same time, the net asset values (NAV) of short-term fixed income and money market funds (as of May 11, 2007) have increased by 116 percent and 95.2 percent, respectively.

These changes in investment behavior are in line with the findings of a KResearch survey recently conducted with 300 investor respondents to shed light on their current investment behavior vis-à-vis last year. The poll found that more than 77 percent of the respondents had said that the recent economic slowdown had had some influence on their investment decisions, while 23 percent of them said that it had not.

The findings also showed that 35.4 percent of the investors responding had adjusted the weightings of the various types of assets in their portfolios, while 35 percent of them had opted to change the size of their overall investments. Meanwhile, 20.2 percent said that they had opted to shift to other types of assets. From interviews with stock investors of more than 53.2 percent, they answered that they had reduced their investment proportions in equities from their levels last year, being mostly because they are still not confident about the investment atmosphere this year where political uncertainty still looms. Some 48 percent of the above respondents (53.2%) said that the Thai economy is showing signs of a slowing trend. As for other reasons given, 21 percent pointed out that they were receiving lower yields on their investments in stock, 18 percent view that investments in equities have higher risk than other types of assets, and 10 percent answered that they had shifted their investments to other types of assets instead. Moreover, more than 54 percent of the respondents who had said that they had reduced their stock investments from last year's levels were found to have decided to increase their funds in deposits at banks, because they view it as the least risky alternative and more familiar to them than other types of investments. However, 35 percent of the respondents answered that they had increased their investments in mutual funds.

KASIKORN RESEARCH CENTER projects that the possibility of deposit rates falling more in the near future will result in some deposit customers reducing their deposits and turning to other investment channels where risk is moderate but give higher yields than bank deposits. Amid the situation of an uncertain economy, investors still have the chance to invest in a variety of instruments apart from deposits with banks. They can select the investment channel that fits their risk appetite, liquidity and have the most appropriate investment tenor. For example, investors who have very low risk appetites and want short-term investments can choose funds that invest in public debt instruments or treasury bills, while those who want to invest longer can select fixed income funds with longer maturities. Investors who can accept higher risk in exchange for higher yields may choose to invest in stock with good fundamentals that give satisfactory dividends, etc. Moreover, when negative factors that are of investors' present concern, e.g., politics and the economy, have transcended into a brighter direction some time in the remainder of this year, that would definitely help improve investors' morale and increase interest in stock again.

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Disclaimer: This research paper is arranged for public information, which has been obtained from sources believed to be reliable. KResearch does not warrant its completeness, reliability or accuracy for commerce or fitness for a particular purpose. The information contained herein may be subject to change at any time without notice. Reliance upon any information contained herein shall be undertaken at a user's own risk. KResearch shall not be liable to any user, or anyone else for any damage occurring from the use of any content herein. Nothing in this research paper shall be counted as containing any advice, recommendation or opinion for decision making in business.

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