Stock investors 'facing more risks'

Prinn Panitchpakdi, managing director of CLSA Securities (Thailand), believes that investors in the Stock Exchange of Thailand are facing increased risks.

“One of the major external risks is the flow of international funds in the wake of the US Federal Reserve’s signal that it may taper its quantitative-easing policy. This led to redemption by several international fund managers, especially US and European pension and mutual funds.

“Over the past month and a half, we’ve seen foreign net-sells in the Thai stock market. In other words, there is a growing risk premium. The forward-looking price-to-earnings ratio has risen to 17-18 times, so Thai stocks are no longer cheap.

“The US QE policy has resulted in massive funds flowing into emerging markets, including Thailand, in search of the highest possible returns. Over the past four or five years, US$100 billion to $200 billion [Bt3.1 trillion to Bt6.2 trillion] has flowed into Thailand alone, and the net outflow has so far been partial, maybe a quarter or less. So it’s just the beginning.

“The tapering of QE means that massive funds [as printed by the US monetary authorities via monthly purchases worth $85 billion of Treasuries and mortgage-backed securities] would return to the US or Europe, where investor  [sentiment] is now more favourable.

“Emerging markets in Asia have shown signs an economic slowdown. [Growth of] the Chinese economy is slowing from nearly 8 per cent to 7-something as China struggles to avoid a hard landing.

“Over the [next] five to 10 years, China will see a gradual slowdown. Towards 2020, China’s growth rate would be at most 5.5 per cent per annum.

“On the QE tapering, we believe that it won’t happen any time soon and the soonest will be early next year, not this year, as unemployment is still as high as 7.5 per cent against the Fed’s target of 6.5 per cent, while the inflation rate remains low at 1.1 per cent against the target of 2 per cent.

“Printing money as done by the Fed has not yet resulted in higher inflation. In other words, the US has been unsuccessful in inflating its economy so far, so the multiplier effects are limited. Banks have not boosted their lending because of the weak recovery. Deleveraging is still the case with weak purchasing power. New-home sales have improved, but details show that buyers were mainly institutional or foreign investors betting on the US recovery, not Americans who got new jobs.

“The Fed  [should] be more careful when it talks about QE tapering, since the psychological effects are powerful, sending the wrong signal to the markets. 

Ben Bernanke, the outgoing chairman of the Fed, wanted to show the world he had started the exit process for the QE programme before leaving the post next January, but the fact is that the US economy is not yet in a sustainable recovery stage.

“Credit growth in the US is a clear indicator that the recovery is not solid, as it fell from more than 5 per cent per annum a year or two ago to just 1 per cent or something today. US authorities will likely have to find new stimulus measures, or if they want to taper the QE programme, it will be very little.

“I don’t think the QE tapering will happen until the US unemployment rate falls to 7 per cent from the current 7.6 per cent.”