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After the storm, winds of change are blowing across markets

For the past year, the Stock Exchange of Thailand was sorely tested by challenges from both at home and abroad. Domestic political turmoil dampened investor confidence.

This was worsened by a series of announcements in the United States on tapering of its quantitative easing (QE) programme and subsequent emerging-market distress. Nevertheless, the SET proved its resiliency as it rallied to a one-year high after the military intervention of May 22 on the back of strong fundamentals: corporate profitability, a deep and diversified market, and economic-policy continuity.

First, the underlying potential of Thai corporates has always been strong although it was previously obscured by political uncertainty. The quick rebound of the market validates this. Revenue and gross profits of listed companies were little affected by economic slowdown, growing favourably in the last quarter of 2013 and the first quarter of 2014, partly because of the trend of Thai companies investing directly abroad. Foreign revenue reached 40 per cent of total revenue of listed firms that disclose such information in their annual financial reports.

Overall, Thai stocks proved to be largely discounted over the past year from QE tapering and domestic political unrest. The forward P/E (price to earnings) ratio has risen of late, but is still more attractive than regional peers. Should the economy pick up over the rest of the year as projected, this could only pose upside gains for corporate earnings.

Second, among regional peers, the Thai stock market is notable for its liquidity and diversified investor base. These traits added to its resilience in the face of turbulence.

As foreign investors sold off amid domestic political turmoil and global risk aversion, local investors, both retail and institutional, took advantage of buy opportunities and balanced the market. Once political stability returned in early June, the market rebounded as foreign fund flows gradually returned and retail investors emerged from their wait-and-see mode.

Going forward, the outlook for deeper foreign-investor participation is positive. As the advanced economies recover, foreign funds are likely to seek out higher returns in emerging markets, Thailand included. For example, the Japanese government's pension fund - the world's largest - plans to send more than US$120 billion (Bt3.8 trillion) into new markets to boost returns.

Third, Thailand's macroeconomic fundamentals have always been sound, although they were previously obscured by political turmoil and policy uncertainty. The military intervention is by no means a positive event but has nevertheless lifted the political deadlock of the past six months. The National Council for Peace and Order's political road map aimed at restoring democracy and an economic framework composed of growth-friendly policies brought back private-sector confidence. As a result, the SET Index surged, surpassing its level at the onset of the protest last October; the average daily trading value surged to more than Bt46 billion in June from about Bt30 billion earlier this year.

The strong fundamentals of Thai corporates and the Thai economy as well as significant reforms in the pipeline could help return the SET to being the market of choice for all - foreign investors included. Going forward, the NCPO and subsequent governments need to act on their promises. Now, more than ever, it is important to maintain a momentum of good news for the market and the country. Indeed, maintaining the momentum will not be easy, but it appears markets have already given their vote of confidence.

Kiatipong Ariyapruchya and Piyaporn Sodsriwiboon are with the Capital Market Research Institute, SET.


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