Investment Planning :
Are You Being Compensated Enough for Holding Thai Stocks?
The sharp retreat in stock markets worldwide in May, and the increased volatility in share prices, has set off alarm bells globally. The losses have been most pronounced within the emerging markets. The MSCI Asia ex Japan Index tumbled 6.2% during the last two weeks of May, while the MSCI Emerging Markets Index suffered a more than 8% fall. The SET Index lost more than 80 points in two weeks and may very well drop below the psychological support level at 700 points in the coming weeks. In my view, none of this is unexpected. The release of the stronger than expected consumer price data in the US , stemming from record high oil prices, triggered an inflation scare that may force the Fed to be much more aggressive with its monetary policy. The natural “knee-jerk” reaction would be to pull back from equity and become much more risk averse. But it does not have to be this way. One strategy to take is to invest for the long term and ride out the current market turbulence. The other more appealing option is to diversify globally instead of keeping all your investment in the Thai market As part of the Stock Exchange of Thailand (SET) 30 th anniversary, its research department recently put out quite an interesting data on the long term return in Equity, Bond, Cash and Gold over the past 30 years from 1975 through 2005. Had you invested Baht 1,000 in the stock market in 1975 when the SET was first established, your investment would have grown by 2,900% to Baht 30,308. While during the same period, had you invested in bond, cash and gold, your Baht 1,000 would have grown to Baht 19,252, Baht 8,954 and Baht 2,487 respectively. Chart 1
It is interesting to note that equity easily outperformed all other asset classes over the long run but many people still keep the bulk of their investment in cash and bonds, even though they can afford to invest for the long term. Chart 1 above is a living testament that if you take the time to allocate your asset properly and invest for the long term, there is no need to be afraid of equity. Just ride out short term market volatility and you will come out on top in the end. To make matters more interesting, when you look at the net return i.e. after inflation and tax adjustments, the return numbers for all asset classes are shockingly lower. Inflation takes a big bite out of your investment return. In fact had you invested in gold over the past 30 years you would have lost half your money on a net return basis. The lesson here is to invest in equity for the long term if you are going to have any realistic chances to outpace inflation. Ever since Dr. Thaksin became Prime Minister 5 years ago, the SET Index has enjoyed an uninterrupted bull run with an average compound annual rate of return in excess of 17% (See Chart below). Admittedly, the strong market performance was due to the “low base” effect i.e. share prices were cheap to begin with. But without a doubt, structural improvements in economies, stricter corporate disciplines and privatization of state enterprises have been important buying catalysts. Low interest rates and cheap borrowing costs have also spurred more investment. However, this straight-line improvement is rare and cannot be sustained indefinitely. Although, during the first 4 months of this year, share prices had been immune from the political undercurrents, with the SET Index rising by over 9%, because of strong corporate profits. But as US interest rates continue to rise, global investors will be asking themselves the same question whether they are being compensated enough for holding Thai equity. And the sharp retreat in the SET during the past couple of weeks seems to suggest that risk aversion is on the increase. The real surprise is that it has taken this long for the effects to be felt. All this while, inflation has been rising rapidly to the current rate of 6% as of April and the political deadlock will likely shave a few percentage points off this year's GDP number and the year 2006 has been written off by most analysts.
Therefore, if you look at the long term compound annual rate of real return on an after inflation and taxes basis from 1975 through 2005, Thai equity only yielded 5% while that of bond is 4%. The “1%” gap between equity and bond seems hardly worthwhile considering that the equity market is so much more volatile. The immediate outlook for the SET is one of increased volatility and it would be wise to take this opportunity to scale back your exposure by diversifying through our Foreign Investment Funds.
Are You Being Compensated Enough for Holding Thai Stocks?
The sharp retreat in stock markets worldwide in May, and the increased volatility in share prices, has set off alarm bells globally. The losses have been most pronounced within the emerging markets. The MSCI Asia ex Japan Index tumbled 6.2% during the last two weeks of May, while the MSCI Emerging Markets Index suffered a more than 8% fall. The SET Index lost more than 80 points in two weeks and may very well drop below the psychological support level at 700 points in the coming weeks. In my view, none of this is unexpected. The release of the stronger than expected consumer price data in the US , stemming from record high oil prices, triggered an inflation scare that may force the Fed to be much more aggressive with its monetary policy. The natural “knee-jerk” reaction would be to pull back from equity and become much more risk averse. But it does not have to be this way. One strategy to take is to invest for the long term and ride out the current market turbulence. The other more appealing option is to diversify globally instead of keeping all your investment in the Thai market As part of the Stock Exchange of Thailand (SET) 30 th anniversary, its research department recently put out quite an interesting data on the long term return in Equity, Bond, Cash and Gold over the past 30 years from 1975 through 2005. Had you invested Baht 1,000 in the stock market in 1975 when the SET was first established, your investment would have grown by 2,900% to Baht 30,308. While during the same period, had you invested in bond, cash and gold, your Baht 1,000 would have grown to Baht 19,252, Baht 8,954 and Baht 2,487 respectively. Chart 1
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It is interesting to note that equity easily outperformed all other asset classes over the long run but many people still keep the bulk of their investment in cash and bonds, even though they can afford to invest for the long term. Chart 1 above is a living testament that if you take the time to allocate your asset properly and invest for the long term, there is no need to be afraid of equity. Just ride out short term market volatility and you will come out on top in the end. To make matters more interesting, when you look at the net return i.e. after inflation and tax adjustments, the return numbers for all asset classes are shockingly lower. Inflation takes a big bite out of your investment return. In fact had you invested in gold over the past 30 years you would have lost half your money on a net return basis. The lesson here is to invest in equity for the long term if you are going to have any realistic chances to outpace inflation. Ever since Dr. Thaksin became Prime Minister 5 years ago, the SET Index has enjoyed an uninterrupted bull run with an average compound annual rate of return in excess of 17% (See Chart below). Admittedly, the strong market performance was due to the “low base” effect i.e. share prices were cheap to begin with. But without a doubt, structural improvements in economies, stricter corporate disciplines and privatization of state enterprises have been important buying catalysts. Low interest rates and cheap borrowing costs have also spurred more investment. However, this straight-line improvement is rare and cannot be sustained indefinitely. Although, during the first 4 months of this year, share prices had been immune from the political undercurrents, with the SET Index rising by over 9%, because of strong corporate profits. But as US interest rates continue to rise, global investors will be asking themselves the same question whether they are being compensated enough for holding Thai equity. And the sharp retreat in the SET during the past couple of weeks seems to suggest that risk aversion is on the increase. The real surprise is that it has taken this long for the effects to be felt. All this while, inflation has been rising rapidly to the current rate of 6% as of April and the political deadlock will likely shave a few percentage points off this year's GDP number and the year 2006 has been written off by most analysts.
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Therefore, if you look at the long term compound annual rate of real return on an after inflation and taxes basis from 1975 through 2005, Thai equity only yielded 5% while that of bond is 4%. The “1%” gap between equity and bond seems hardly worthwhile considering that the equity market is so much more volatile. The immediate outlook for the SET is one of increased volatility and it would be wise to take this opportunity to scale back your exposure by diversifying through our Foreign Investment Funds.