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November 30, 2000

From Our Correspondent: Hirohito and the War
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DECEMBER 17, 1999 VOL. 25 NO. 50

Overbought in Bangkok
Reality bites investors expecting more reform


photo
Panich Vikitsreth doubts that foreign investors will soon be piling into the funds he manages for Ayudhya Jardine Fleming in Bangkok. But for investors determined to be in Thailand, well-chosen equities are a better bet than fixed-income savings
photo: Marcus Gortz for Asiaweek
 
Not many months ago, the Bangkok SET was keeping pace with Singapore as one of Asia's most successful stock exchanges of 1999. But while Singapore has held its first-half gains since then and built on them in recent weeks, Bangkok has floundered. Less dramatically, the baht has also come off highs against the dollar earlier in the year and is now slightly below where it started 1999. The last weeks of the year may not see much improvement, according to Panich Vikitsreth, executive director and chief investment officer at Ayudhya Jardine Fleming in Bangkok. He runs a handful of fixed-income and equity funds, and he believes overseas investors will be wary because of concerns over Thailand's Y2K readiness and the progress of reform overall. He thinks Thai stocks represent a better bet than safe, low-interest fixed investments like savings accounts, but he doesn't see foreigners returning in a big way to Thailand anytime soon. Panich, 37, spoke recently with Asiaweek's Julian Gearing in Bangkok. Excerpts:

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Stock prices picked up in the first half of the year but then fell back. What has happened?
Reality hit in the third quarter when investors recogniized a lot of their expectations weren't being realized as quickly as they thought. For example, basically we need more money in the banking system [to solve] the non-performing loan problem. And company earnings haven't picked up. You might see some companies starting to make some profit. But overall Thai equities [have not been] very profitable. We forecast that the bottom lines of these companies will not show a decent return until 2001. But for 1999-2000, I think the valuations for the Thai market are very difficult to justify.

In other words, Thai equities are not the place to be?
If you need to be in Thailand - for example if you are Thai and find it difficult to invest abroad - then equities are better than savings accounts or fixed-income products. But I want to be frank. If you are a regional fund manager or a global investor you probably can find more value in northern Asia - in Korea, in Taiwan, in Japan.

How does the pace of economic recovery in Thailand look in the near-term?
Thailand has done a lot - reforming banks, the financial sector, the property market - to help stabilize the situation. But in my opinion, it is too soon to use the word "recovery." When you talk about economic recovery people tend to think that we are actually in a growth period again. I don't think that we should be overly optimistic about growth. Some of the numbers show good improvement. But the improvement needs time before it becomes sustainable.

Is this merely a short-term problem or can we expect further trouble over the coming months?
Many domestic corporates are seeking U.S. dollars to repay foreign debt. They know they ought to switch their borrowing to domestic [sources], where they can take advantage of a low-interest-rate environment [borrowing locally in Thailand is currently cheaper than going to overseas lenders]. And of course many banks are encouraging corporations to replace foreign debt with domestic loans.

It is possible to find value in the stock market?
Banking is one of the most problematic sectors because of non-performing loans. But banks will also recover the quickest if the economy revives very fast. In terms of manufacturing, many cement companies, ceramic-tile companies and electronics companies look attractive. Now they are only 60% utilized. [In a recovery,] every percentage increase in [capacity] utilization gives you higher return on your investment. But you have to be very patient.

What about telecommunications?
Companies like Shin Corp. or Advanced Info Service can be good where you see penetration rates still climbing very quickly on mobile-phone use. Companies like PTTEP and Banpu [appear to be] overbought. I think the upside potential on this type of stock is not there. Some other energy stocks look very promising like Electricity Generating Co. where you can see electricity sales have picked up pretty sharply. If you are [investing] long-term and can sustain illiquidity, the hotel sector is a great buy. Agriculture is also very, very attractive, but there is little [choice] in agriculture companies. You have Charoen Pokphand Feedmill, which is very good. You have Thai Union Frozen Products. But compared to the market, these are small.

When will the banks start lending again?
That has been the question for both the private and public sectors. The government was encouraging the banks to lend way back last year. At the end of last year, the Bank of Thailand asked the commercial banks, all of them, to give lending forecasts - how much they planned to lend in 1999. The numbers came in a very, very wide range, some people [predicted growth of] 2%; some said 6%. The 2% came from the big banks, and the 6% came from the more aggressive ones.

Do Bangkok Bank and Thai Farmers Bank need to recapitalize more?
They have to. I think all the banks, and especially the two you mention, need more capital. And foreign investors will look very closely to see whether or not they are utilizing the capital they raised from public investors in an efficient way.

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