Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
An Eastern Perspective
12/01/2006 12:00 am EST
Globetrotter Yiannis Mostrous always shines a unique light on interesting international economies and markets. Here, he gives his subscribers the benefit of his keen insight into an up-and-coming market that is still an enigma to many investors.
"The Thai market continues to lag Asia's indexes, though it has rallied beyond pre-coup levels, up 13.4% in dollar terms for the year and long-term investors should have exposure. Political developments aside, one of the reasons for the weakness is the backdrop of high interest rates. The Bank of Thailand (BOT), one of the most independent central banks in Asia, has raised rates substantially since 2004 (from 1% in July 2004 to 5% in June 2006) because of inflation fears. But recent developments, especially lower oil prices, have been pointing to the opposite direction, i.e., rate cuts.
"Asia is a notoriously inefficient user of oil and Thailand is one of the worst offenders. Weaker oil prices are hugely positive, lowering inflation expectations while improving the country's external account. The sharp fall in inflation during the past couple of months has been substantial.
"In addition, Thailand's currency, the Thai baht, has remained strong and has helped the case for lower inflation and an increase in foreign exchange reserves. The baht is at its strongest level since the summer of 1999, up more than 2% in the past month and 12% year-to-date.
"I expect the BOT--once officials are more certain that oil prices won't spike again--to cut rates sooner rather than later, helping economic growth. A rate cut should happen either during the BOT's final meeting of 2006 on December 13, or early in 2007. The BOT recently released its revised forecasts for 2006-07, all positive. It revised inflation forecasts and core inflation downward to between 4.3% and 4.8%, and between 2% and 2.5%, respectively, and current account surplus forecast upward to between USD1.5 billion and USD3.5 billion.
"The Thai market is also trading at undemanding valuations, including a price-to-earnings ratio of 9.6, and hasn't yet priced in an improving scenario for the Thai economy. Banks remain the best way to play the potential 2007 upside. Year-to-date bank earnings have been strong. Margins are improving and, excluding Japan, the group remains the second-cheapest bank sector in Asia, following South Korea.
"Banks have traditionally outperformed the market in the usually strong period between the end of October and the end of January. I expect this pattern to continue. SRI Portfolio holding Bangkok Bank (BKKPF OTC) remains my favored play for Thailand exposure. I also continue to favor Portfolio holding Shinhan Financial (SHG NYSE), a South Korea-based bank with a cheap valuation."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...