Key features from Thailand's economic numbers in May were signs of slowdown in domestic demand but a surprisingly continued strong growth in exports. For the key data points, growth (yoy) of manufacturing production was 10.5% (vs. 10.1% in April), private consumption 6.3% (vs. 7.8%) and exports 22.1% (vs. 27.7%). As import growth decelerated remarkably, both trade balance and current account swung back into surpluses. Thai baht continued to weaken to Bt33.4/US$ as at the end of June (from Bt32.5/US$ at the previous month-end). Inflation continued to accelerate, with headline number hitting 8.9% in June (vs. 7.6% in May), driven again by higher energy and food prices.
Fixed income market
Bond prices were negatively impacted by surging inflation. In June alone, the 5-year Thai government bond yield surged 123bp to 5.6%. As bond yields rise, bond prices fall. Given rising bond yields, the TBMA Government Bond Index posts a negative return of 3.5% in June.
There have been ongoing debates whether or not the Bank of Thailand should pursue monetary tightening amid the ongoing inflationary environment. In one camp of economists, it is argued that interest rates must inevitably be hiked to prevent inflation from spiraling out of control, as we have all learned from Economics 101. In the other camp, the argument is that monetary policy should not be used to cope with the ongoing “cost-push” inflation and monetary tightening at this point of time will stifle domestic demand. At the time of going to print, the market is pricing in 100-125bp hike in local short-term rates over the next 12 months.
Stock market
Thai stocks lost 7.8% in June and 10.4% in 1H08 due to a combination of negative external and domestic factors. Externally, skyrocketing oil prices had raised concerns about global inflation and growth outlook, prompting sell-offs of global, including Thai, equities. Domestically, higher political tension from street protestors had dampened business sentiments and raised a big question mark on the government's ability to effectively implement its economic policies. Foreign investors were net sellers of Thai stocks amounting to Bt50bn in 1H08, out of which Bt37bn was the net-selling value in June alone.
While many analysts are struggling to pinpoint near-term catalysts for Thai stocks, I see current share prices of certain Thai stocks as being attractive for long-term investments. I am still a believer that, with proper diversification into a portfolio of fundamentally sound stocks, investors will be better rewarded in the long run compared to holding a pure fixed-income portfolio.
Global equity market
Equities worldwide lost 8.1% in June and 11.7% in 1H08. No key regions escaped the June sell-offs, with the US -8.6%, Europe -8.8%, Japan -6.6%, Global Emerging Markets -10.2% and Asia Pacific ex-Japan -12.1% (all in US$ terms). Inflation had replaced sub-prime crisis on newspaper headlines. From an economic perspective, the two problems appear a toxic combination. In other words, inflation is an undesirable factor that complicates the tackling of sub-prime problems and heightens risk in the global economy. Central bankers can no longer turn to monetary policy as a tool to support economic activities. Consumption also seems inevitable to be adversely affected by rising cost of living.
Commodities
Commodity prices continued to surge forward in June, during which the Rogers International Commodities Index (RICI) – which represents global commodity prices – gained another 8.7%. In terms of the sub-sectors, agriculture performed the best (+10.8%), followed by energy (+9.5%), precious metals (+3.8%) and industrial metals (+3%). Year-to-date, RICI was up 29.3%, with energy being the best performing sub-sector, followed by precious metals, agriculture and industrial metals.
I remain optimistic on the long-term outlook of commodity prices, based on the demand and supply dynamics. However, I am neutral about the near-term upside. In other words, an investor should approach commodities as a long-term component of his/her portfolio, not as a stand-alone short-term speculative play.
What to do?
Dollar Cost Averaging (DCA) is the answer. Don't bother to time the market because it does not work, as I have said so many times before. Just make the most of what the Revenue Department has given us. Personal income tax deductions for both Long Term Equity Funds (LTF) and Retirement Mutual Funds (RMF) are now Baht 500,000 a piece, which is quite generous. The only thing one should be careful about is in the selection of fund managers. As of June 30 th 2008, there are 51 LTFs to choose from with a one-year return ranging from 14% to -15%. (Please see attached Table). While the average return for a 3-year period came in at 34.45%, which works out to be a respectable 11% return per annum. By investing an equal sum each month over a period of time, you will ride out market volatilities. However, due to the massive divergence in the investment performance of these funds, it is highly recommended that you should consult a qualified financial planner before investing.
As for RMFs, there are more asset classes to choose from: equity, balanced, flexible, bond and cash. But as you can see from the attached table, the one to go for is equity RMFs because these funds are meant for retirement purposes, therefore, one can afford to take the long term view and during the past 5 years ending June 30 th 2008, the performance of equity RMFs (135%) outperformed bond and cash RMFs (8.3% and 11.9% respectively) by a significant margin.
