Time for some housekeeping.

[david]

A lot happens in one a week in Thailand: The King’s signing of a royal
decree to approve October’s election comes as a surprise and adds
greater certainty to the election proceeding – a political solution seems
nearer. Our economics team has revised down interest rate
assumptions and believes the cycle has peaked.
!  The stock market will likely rally on the above developments; However,
we think it unsustainable. Rising commodity prices are of far greater
concern. Thailand runs the largest commodity deficit in Asia and as
prices rise, the economy slows. Politics has done little more than
impact sentiment while lower interest rate assumptions reflect a weak
economy. There is downside risk to our 3.5% GDP growth target.
!  Look to reduce positions in some of our least favourite sectors such as
contractors (ITD, Stecon and CK), brokers (Asia Plus and Phatra
Securities) and second line banks (KTB, TCAP, SCB and SCIB). Continue
to buy solid defensive names like Thai Beverage, Bangkok Bank and
mobile operator, AIS. Oil related stocks should continue to rally such as
PTT and PTTEP.
A busy week
A lot can happen in a week at CLSA Thailand. First our economics team does a Uturn
and decides the Bank of Thailand will no longer raise interest rates, wiping out
our anticipated 50bp rise in the repro rate over the summer months to 5.5%.
Secondly, the King signs a royal decree from his hospital bed approving the October
15 election - suddenly it looks as though a solution is in sight to the political
impasse. With two headwinds (interest rate and politics) seemingly removed almost
overnight, it looks as thought the Thai stock market might stage some form of rally.
Once bitten, twice shy
And rally the stock market probably will but we think it unlikely sustainable. This
analyst writes with some scepticism that he’s been here more than once since the
beginning of the year on both interest rates and politics. In January, we were
supposedly 50bp from the peak of the interest rate cycle and yet rates have risen
100bp since. On politics, Thaksin’s resignation in 1Q06 was supposed to herald the
beginning of a political compromise but this failed to materialize. Despite scepticism
on both these fronts, it is neither politics nor interest rates that are key immediate
drivers for a sustainable stock market rally – it is the direction of commodity prices,
and in particular oil that really matters.
Running the largest commodity deficit in Asia
As we have pointed out numerous times before in this publication, Thailand runs
the largest commodity deficit in Asia. The country has a shortage of coal, iron ore
and in particular oil. In our economic team’s report, Accounting for Oil, Thailand
was estimated to be the most exposed of any Asian economy to an oil shock – a
real concern as oil prices ascend to record highs.
Two headwinds removed
overnight – really?

  Time for some housekeeping
Therefore, while the mirage exists that this week we have moved closer to a
political solution and this month we think we’re closer to a peak in the interest rate
cycle, we would advise investors take opportunity of any stock market rally to
conduct a bit of housekeeping. Look to reduce positions in some of our least
favourite sectors such as contractors (ITD, Stecon and CK), brokers (Asia Plus and
Phatra Securities) and second line banks (KTB, TCAP, SCB and SCIB).
   The King has signed a royal decree approving the October 15th election. What is
surprising is that this announcement was made the day after a complicated
operation on his majesty’s spine, suggesting the document was dispatched from
hospital. He was due to convalesce for a month. Some will see this as implied
approval of the election and Thaksin. However nothing can be read into this with
certainty. Under the constitution, the King has no option but to sign a royal decree
presented to him by a prime minister. The King could have possibly delayed signing
the decree but that would have been interpreted as direct intervention in politics -
something he has stressed a will to avoid.
Uncertainties and risks remain
Greater certainty that an election will proceed brings us a step closer to a political
solution and is a positive catalyst for the stock market. In previous discussions the
main opposition party, the Democrats, had indicated they will participate in the
next election no matter what. However, risks abound and as quickly as the King
made it look as though an election would occur, so could some unforeseen event
make it look once more unlikely to occur.
The Election Commission hangs on
Some of these possible risks stem from the Election Commission. This body is
responsible for overseeing the election process. Despite having been found guilty of
malfeasance in organizing the last elections, three out of the five members have
refused to step down raising allegations that they are showing a bias towards and
protecting Thaksin’s administration. An election organized by remaining members
and seen as being bias toward Thaksin would likely antagonize the situation.
Political parties face disbandment
Further risks to a political situation come from the possible disbandment of major
political parties for electoral violations. Prosecutors have decided to pursue cases
against all major parties forwarded by the Election Commission. It is not known
when a judgment will be forthcoming. In our view, imprisonment of political leaders
and disbandment of major parties would be unlikely. The resulting chaos is
something the judiciary is likely to want to avoid. However, this can not be ruled
out.
As quickly as the King
made it look as though an
election would occur, so
could some unforeseen
event make it look once
more unlikely to occur
Thailand Market Outlook 23 July 2006
Page 4 of 4
Right back where we started
A number of other political risks remain, too numerous to be listed here. But one
major concern must be the outcome of an eventual election which Thaksin will
likely win given his widespread grassroots support. While Thailand’s urbanites may
initially accept a Thaksin win at the polls, if he does not change his ways protests
will once more re-commence. In other words, we’ll be right back where we started.
Peak of the interest rate cycle?
While political risks remain, so too do risks to our revised interest rate view. The
decision by our economics’ team to revise down interest rate expectations comes
less from a feeling that inflationary pressures have been beaten but more from the
realization that the underlying Thai economy is weaker than expected – not exactly
positive for the stock market. The Bank of Thailand has been one of the most
proactive central banks in Asia on the inflationary front, raising rates over 300bp in
the past two years in line with the US. The Bank of Thailand now has ample room
to loosen policy going into 2007 in order to stimulate the economy.
Economy weaker than expected
And stimulate the economy may be exactly what the Bank of Thailand needs to do.
Indeed, our economics’ team points out that there is downside risk to our 2006
3.5% GDP growth forecast. The problem stems from declining business and
consumer confidence which is in part due to politics (although the lesser of the two
evils) but primarily due to rising commodity prices.
Risk that interest rates rise further
As we have repeatedly pointed out, Thailand runs the largest commodity deficit in
Asia. As commodity prices continue to reach new record highs, investment and
consumption slow. However, Thailand faces a dilemma. If commodity prices
continue to rise and translate into greater inflationary pressures than forecast, US
interest rates will continue to rise past our expectations of a further 50bp rise to
the peak. Thailand cannot allow the interest rate differential with the US widen to
the extent that its currency weakens. This will only put further pressure on its
terms of trade and worsen the already ballooning commodity deficit. In this
scenario, rates will have to rise higher.

[jaychou]

Does "House Keeping" mean "Cleaning" ?

Dave, you are cleaning the portfolio, ain't you?   8)

ดูแลบ้านแปลว่าทำความสะอาดหรือป่าวคับ

เอ..แล้วท่านเดวิดล่ะ กำลังล้างปอดอยู่ไม่ใช่เหรอ? 8)

[david]

Does "House Keeping" mean "Cleaning" ?
                                       Right.
Dave, you are cleaning the portfolio, ain't you?
                                       

ดูแลบ้านแปลว่าทำความสะอาดหรือป่าวคับ

เอ..แล้วท่านเดวิดล่ะ กำลังล้างปอดอยู่ไม่ใช่เหรอ? 8)