INVESTMENT: A GREAT ROTATION AND A MARKET BULL RUN?
Istarted investing in the stock market a long time ago and I have been through many ups and downs of stock market cycles. Given the experience, I am generally quite resilient when it comes to stock market crashes. In the nearly 10 years since the subprime crisis in 2008, the Thai stock market has performed very well. In fact, if you had been investing in Thai equities since then, you would have received a total return including dividends much higher than if you had invested in any other neighbouring countries. Over the past year alone, the SET index has gone up 22.6%.
So has the price gone too far? This is the question we all ask, especially when things seem too good for an extended period of time. Across the continent, Wall Street likes Donald Trump’s economic plan and thinks that his policies to cut taxes, lighten regulations and invest heavily in infrastructure will be good for the United States and lift corporate profits. Since the US election on Nov 8, the Dow Jones Industrial Average has risen to an all-time high, approaching 21,000 and gaining almost 30% from a year ago.
In fact, there has been a lot of talk about a stock market bubble and possible crash for some years now. Still it has not happened. As a long-time investor, I think the market is not going to crash anytime soon because investors are not euphoric. The markets may be at record levels, investor optimism may be rising, and the CBOE Volatility Index, also known as the Fear Index, may be at its lowest since 2008, but anxiety abounds in the markets. Investors have been and still are nervous because they don’t know what to expect from the changing social and political landscape.
The market usually climbs on worry and slides on euphoria. The recent rush into stocks is a late reaction by investors who have been cautious about stocks after tremendous gains in valuations over many years. Weak underlying economic growth, global central bank intervention in financial markets and periodic global shocks have all kept investors from being too optimistic.
When it comes to investing, the goal should be about determining the view of the mass. It does not really matter whether the view is correct or reasonable, because after all, it is market perception that matters. History tells us that if the crowd is leaning in one direction, taking an opposite position would usually be quite rewarding.
Behind the recent surge in stocks is the idea called the Great Rotation, which predicts that a bond bull market will come to an end and investors will shift their money to equities, pushing stocks sharply higher.
The market has been expecting the end of the bond market for some years now. But in reality, it hasn’t happened and the great rotation has not been so great. Even as bond yields have surged, which pushes prices down, investors have bought bonds. This is because investors, especially institutions, are still wary and want to balance their risk.
In 2017, as inflation is expected to rise, further rotation from entrenched long positions in bonds to assets such as stocks that benefit from higher rates and inflation will become more pronounced.
At a structural level, I think the Thai stock market is still a good place to invest. In spite of its ups and downs, the Thai market is relatively well developed. At the end of 2016, market capitalisation was US$437 billion, compared with Korea ($1.28 trillion) Singapore ($649 million) Indonesia ($434 million), and Malaysia ($363 million). The local stock market’s role in the economy, as measured by market capitalisation to GDP, is 117%, behind Singapore (221%) but ahead of Malaysia (116%), Korea (92%) and Indonesia (50%).
Over the past 10 years, almost 140 new companies have listed on the Thai bourse, bringing the total to 656, compared with Korea (2,059), Malaysia (903) Singapore (757) and Indonesia (537). The Thai market is also especially liquid, as measured by turnover velocity of 62, compared with Korea (106), Singapore (27), Malaysia (21) and Indonesia (19).
Given this potential, I think we should not dwell too much on the negatives about Thailand’s slow economic growth or focus on what is wrong with our country. Rather, it would be better to simply ride the positive trend of the global financial outlook, support our capital market and make it bloom. As with anything else, perception matters. Capital market strength will readily boost investor sentiment and increase consumer confidence, positively affecting corporate profits and economic growth.
Despite the already encouraging statistics for Thai equities, there are several areas where the market can improve. These include encouraging more participation of local and foreign institutional investors, reducing the cost of funds for issuers and transaction costs for investors, increasing product variety, as well as strengthening legal, tax and financial technology infrastructure.
Life rarely works out the way we plan it. So we must learn to live with uncertainties and deal with them. Even with this, there are many positive things we can do to prepare for the unexpected. And who knows? It could be a lot better than you think.