All of which creates an unenviable task for Patareeya Benjapolchai, president of the Stock Exchange of Thailand, but she remains upbeat. In 2006, the stock exchange became a fully integrated market that incorporated the main board, the Market for Alternative Investment, the Bond Electronic Exchange and the Thailand Futures Exchange, and recent developments have included the launch of the first commodity futures û for gold û and the listing of the second exchange-traded fund. Stock options will be introduced next year and the marketÆs infrastructure, says Benjapolchai, is already up to international standards.
Corporate governance is also up to minimum international standards, according to the latest assessment by the World Bank under the Corporate Governance Report on the Observation of Standards and Codes, thanks to the implementation of official corporate governance principles for listed companies in 2002, after the government set up its National Corporate Governance Committee.
"Thailand has done relatively well on corporate governance in Asia, with Siam Cement and PTT group scoring highly," says Harry Bunyaraksh, Thai country head of CLSA Securities. "But this needs to be pushed further down through to the mid caps, so that minority investors will feel they are part of the majority family's interests."
The Thai market also ticks all but one of the boxes in FTSE's Quality of Markets Assessment Criteria û its derivatives market is not yet developed, but it stands out from every other exchange in emerging Asia for its openness to foreign investors, its custody and settlement system, and its dealing landscape, which already accommodates short selling and off-exchange transactions. Even Hong Kong still has restrictions on short selling.
Even so, these are tough times û global financial turmoil, stubbornly high oil prices and the countryÆs own political problems. But the embedded strengths of Thai listed companies, says Benjapolchai, have helped to create a "resilient and yet competitive market". The half-year data for 2008 shows that listed companies increased their net profits by 48% year-on-year. Between January 2000 and the end of July 2008, the SET index increased by 358%, which is much better than some of its neighbours.
Indeed, the case for buying the Thai market is relatively good and many foreign investors continue to do so û the investment fundamentals are sound, yields are high and the marketÆs low price-to-earnings ratio makes Thai stocks the cheapest in the region. However, with the current political environment Thailand continues to be a market that is largely ignored by large, conservative investors and remains the domain of emerging markets specialists.
One of the thorniest problems for the Thai market is its lack of correlation to the wider economy. Thailand is the rice bowl of Asia û its food and agribusiness sector is a huge export earner û and the country boasts a world-class service sector in such areas as hotels and tourism, and healthcare. The auto parts industry is also well-developed and a strong contributor to economic growth. But this is not well-reflected in the composition of the stock market, which is heavily weighted towards utilities and the oil and gas sectors. Indeed, energy accounts for more than 40% of the index while oil consumption is less than 10% of the economy.
"Unlike other markets, the Thai stock market is not a good proxy for the real Thai economy," says CLSA's Bunyaraksh. "To me, one possible solution to this is to promote more IPOs, especially those from agriculture and soft commodities sectors and tourism. However, we are in a Catch 22 situation as IPOs are only attractive to founding families when they can list at a good price multiple versus the market."
Benjapolchai at SET is not complacent about this and agrees that the issue needs to be addressed to help make the market more attractive. ôThis is a concern since Thailand is a manufacturing-based economy and stock investment should rely on a countryÆs economic fundamentals,ö she says, adding that the exchange intends to help create a more representative market by diversifying into the real sector, targeting more companies from the industrial materials, agribusiness and automotive sectors, as well as more small and medium-size enterprises.
"To penetrate to manufacturing firms, we have worked closely with many public and private local organisations, such as the Board of Investment, Federation of Thai Industries, Export-Import Bank of Thailand, SME banks, as well as many industry associations," says Benjapolchai. ôIn collaboration with these organisations, we have reached many target companies with high potential to be listed on the SET.ö
The market is also relatively small û the total capitalisation is equivalent to just 65% of gross domestic product. The exchange has set a target of doubling market capitalisation and revenue by 2013. Again, achieving this goal will depend on attracting new supply, which is heavily dependent on improved market conditions.
The exchange is also aiming to broaden the range of investment alternatives by changing certain rules to attract foreign companies and overseas Thai joint ventures to list on the SET. Initially, says Benjapolchai, the exchange will focus on Thai joint ventures in Laos, Cambodia and Vietnam. Besides equity products, the exchange also plans to launch many more new trading products, such as derivatives, ETFs and index-linked products û areas where Thailand has lagged the rest of Asean.
While better valuations are key to attracting new listings, investor education is key to the development of a broader and more active market. ôRetail investors feel they donÆt fully understand what they are investing in,ö says Bunyaraksh at CLSA. ôRemember that retail investors were scared off the capital market after the Asian crisis in 1997 when they went bust trading cash equities on margin. The average Thai views the equity market as a casino, so there needs to be more education on value investing for growth or yield depending on your circumstances, rather than the get-rich-quick mentality.ö
Derivatives is one area where retail investors have been slow on the up-take. ôSo far, their participation has been limited as very few people understand derivatives,ö says Bunyaraksh. ôAgain, we need to educate them heavily in order to get more retail participation.ö
It is still early days, of course. The Thailand Futures Exchange introduced its first derivative product, SET50 index futures, in April 2006. Since then, trading volume and value have steadily increased û the total traded contracts increased from almost 200,000 in the eight months of 2006 to 1.2 million in 2007. So far this year, the total contracts traded amount to almost the total contract trading for the whole of 2007.
SET's Benjapolchai admits that for products such as options it will take longer. ôThose products need time to be introduced among investors, especially the local retail investors who do not easily accept and understand more complex or sophisticated products.ö Index products have proved more popular.
At the moment, the exchange has successfully introduced two exchange-traded funds on equity indices: the ThaiDEX ETF on the SET50 Index and the Mtrack Energy ETF. As of August 29, 2008, 11 months after the launch, ThaiDEXÆs assets under management (AUM) have grown to about $96 million from its initial size of $28 million, with an average daily turnover-to-AUM of approximately 3%. The Mtrack Energy ETF was launched at the start of August this year with an initial size of about $8.5 million.
Another initiative aimed at raising the competitiveness of the Thai stock exchange is a plan to demutualise the exchange, in line with other bourses in the Asean region. This process will involve the reorganisation of SETÆs operations and structure, with an emphasis on better customer satisfaction, new products development and effective post-trade system management, as well as improving revenues. This restructuring is expected to be completed in 2009.
A demutualised and reorganised exchange ought to be in a better position to form partnerships with other exchanges in the region. ôIn terms of international linkages, we are looking forward to strengthening strategic alliances among Asean exchanges in cross-border trading, listing and product and service expansion, on a par with other internationalised exchanges, by establishing closer working relationships among neighbouring countries,ö says Benjapolchai. ôPreparation of the Asean Linkage cross-border trading platform is evidence of our closer working relationship with neighbouring countries. The process of getting the Linkage up and running is going well and is expected to complete and launch for both domestic and international investors very soon.ö
The short-term difficulties facing ThailandÆs capital market are evident, but the plan for its long-term development is in place and provides a responsible and sensible path to maturity that will benefit investors and businesses alike.
This story was first published in the September issue of FinanceAsia magazine.
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