With the market capitalisation of its bourse at around BT11.97trn ($391.42bn) as of late March 2014, Thailand has relatively deep and liquid capital markets by regional standards. A derivatives market has grown significantly since 2007, with particular interest in index and single stock futures, as well as gold futures (see analysis). With support from the Securities and Exchange Commission (SEC) and the Bank of Thailand (BOT), management of the Stock Exchange of Thailand (SET) has driven product innovation and information and communications technology (ICT) upgrades, even if trading remains light for some contracts. While the kingdom’s financial markets have not been spared the global foreign sell-off in emerging markets – there were net foreign outflows of close to $4bn in equities and $1bn in bonds in three months from June 2013 – the correction has proved more limited than in Indonesia and India.
The SET began trading in 1975, replacing the previous Bangkok Stock Exchange, and had a total of 571 listed firms as of mid-2013. Its Market for Alternative Investments (MAI), launched in 1999 and with 89 listed firms as of mid-2013, serves starter listings from mid-sized companies with lighter requirements and lower listing costs. The SET also hosts the Bond Electronic Exchange (BEX), established in 2003 for secondary fixed-income trading, and the Thailand Futures Exchange (TFEX), created in 2006 for non-agricultural futures and derivatives. The Agricultural Futures Exchange of Thailand (AFET), regulated by the Ministry of Commerce’s Agricultural Futures Trading Commission (AFTC), has seen very limited trading since its launch in 1999. The Thailand Securities Depository provides post-trade depository and registration, while the Thailand Clearing House handles settlement and clearing. The Thai Non-Voting Depository Receipts (NVDR) Company, a SET subsidiary set up in 2000, provides depository receipts (DR) for non-resident investors, holding shares on behalf of investors who cannot register stock in their name. NVDRs thus provide for dividend payments for non-resident investors, although they are non-voting. While the exchange is a publicly listed quasi-governmental agency, it is co-owned by brokers holding an exchange seat. Brokers do not share profits, however, as these are retained by the exchange, which pooled over BT15bn ($490.5m) in assets by 2012. Although demutualisation and full corporatisation of the exchange was planned, in early 2012 the finance minister, Kittiratt Na-Ranong, announced that the move had been scrapped.
Equity Bull Market
Thailand’s equity markets offer a comparatively broad range of sector exposures, though many stocks have only limited free floats. The BOT estimates the average free float at well below 30% of firms’ equity. Although five-year corporate tax reductions, from 30% to 20%, were on offer for firms listing over four years to 2005, these have been phased out and the minimum required float stands at a mere 15% of equity. The capitalisation-weighted SET50 Index of leading shares has a higher average free float of 49%, according to BOT data, though the 27 sectoral indices and eight industry group indices show varying levels of liquidity.
Buoyed by growing domestic consumption following the 2011 floods, strong corporate earnings and high foreign portfolio inflows (FPI) supported by loose monetary policy in advanced economies, the Thai equity markets in 2012 achieved their strongest bull market since the 2008 crisis. Market capitalisation expanded 29% to BT11.83trn ($386.84bn) in 2012 and a further 15% to reach BT13.65trn ($446.34bn) in April 2013, roughly 115% of GDP. The market cap fell as the year wore on, however, hitting BT11.5trn ($376.05bn) in December, before recovering somewhat in the new year to around BT11.97trn ($391.42bn) as of late March 2014.
The best performer amongst major Asian markets in 2012, the SET Index rose 36% year-on-year (y-oy) to 1391 points in 2012 and a further 15% to 1597.86 in April 2013. The SET Index declined over the rest of the year, falling to 1298.71 in December 2013, before rising slightly in early 2014 to reach 1349.90 as of late March, up 4.76% year to date.
The market’s price-to-earnings (P/E) ratio rose rapidly from 12.04 in 2011 to 18.25 in 2012. The strongest growth was in retail and consumer shares, with some P/E ratios reaching as high as 30 to 40. “Stocks related to domestic consumption and investment performed particularly well in 2012,” Sasikorn Charoensuwan, senior vice-president of research at Phillip Securities (Thailand), told OBG. As of late March 2014, the P/E ratio was at around 15.25.
While its capitalisation reached roughly four times the 1997 peak by early 2013, brokers remained more cautious in their leverage. “The whole brokerage industry’s margin lending is only around BT80bn ($2.6bn), compared to around BT120bn ($3.9bn) before the Asian financial crisis, so we are not seeing excessive leverage in the system,” the CEO of Maybank Kim Eng Securities, Montree Sornpaisarn, told OBG. Foreign inflows and greater domestic retail participation doubled daily turnover from roughly BT30bn ($981m) in 2012 to BT60bn ($1.9bn) in the first half of 2013, with sporadic peaks at BT100bn ($3.27bn). Foreign investors’ share of market turnover reached 25.2% in 2012, accounting for net buying of BT76bn ($2.5bn) in stocks, compared to 53.3% by local retail investors, 8% from local institutionals and 13.5% from brokers’ proprietary trading. Despite such rapid growth, valuations remained on average lower than in neighbouring markets given the trading discount associated with Thai conditions. “Shares tend to trade at a roughly 10% discount on other ASEAN markets like Indonesia, Malaysia and Singapore, in large part due to political developments since 2006,” Kasem Prunratanamala, head of research at CIMB Securities (Thailand), told OBG.
Thailand was not immune to the significant fund outflow sparked by May 2013 remarks by the US Federal Reserve pointing towards looming tapering of its loose monetary policy. The SET recorded a BT140bn ($4.6bn) outflow of non-resident funds in the three months from June 2013, according to the SET, although daily trading volumes fell only slightly to the BT45bn-55bn ($1.47bn-1.8bn) range. Phillip Securities forecast turnover of around BT45bn ($1.5bn) in 2014. In the first two months of the year, average daily turnover came in at BT31.08bn ($1.02bn) and BT27bn ($882.9m), respectively.
Trading activity increasingly shifted towards bluechip stocks during the correction, with the 10 largest stocks’ share of the daily trading volume rising from 18% in March to 30% in July 2013 and the nonSET50’s contribution falling from 58% to 31% in the same span, according to the SET. Consumption- and investment-related stocks that had led growth during the upturn – such as retail, bank, property and construction shares – were the hardest hit, while relative under-performers – such as energy and petrochemicals stocks – were less affected. As a result, equity investors increasingly shifted into defensive stocks in tourism and health care.
What began as a global emerging markets sell-off sparked by Western investors evolved into broader speculative concerns over economic imbalances in South-east Asia, with global investors selling Thai stocks, the region’s most liquid, as a function of concerns over Indonesia’s macro-economic outlook. “Global fund managers sold off their Indonesia positions as part of a broader regional sell-off, which has affected Thailand,” Pimpaka Nichgaroon, the head of research at Thanachart Securities, told OBG. “There has been a contagion in asset allocation, but not in fundamentals, so we expect Thailand to rebound once the situation settles.”
By end-August 2013 the SET Index had lost around 20% from its April peak, while P/E ratios moderated across the board. Between January and July 2013 average P/E ratios on the SET slumped from 19.26 times to 16.14, the SET50’s fell from 16.86 to 15.28, the SET100’s from 18.06 to 15.64 and the MAI’s from a high of 29.61 to 24.98. “While earnings were strong if not spectacular in 2012, lower economic growth in 2013 and projected for 2014 will curb earnings growth,” Andrew Wong, credit analyst at Standard & Poor’s in Singapore, told OBG. “Luckily, Thai corporates’ investment plans tend to be flexible and can adapt.”
While Thai corporate earnings grew by 15.9% y-o-y in 2012 and a further 17% in the first half of 2013, the corporates’ outlook slowed in line with the prospects for economic growth in mid-2013. “We are seeing a downward trend in corporate earnings growth, which we expect to slow to 15% in 2013 and high single digits in 2014,” Sasikorn said.
The market has drawn a growing supply of new stocks in the past two years, with three listings on the SET in 2011, eight in 2012 and 13 in 2013, alongside seven listings on the MAI in 2011, 10 in 2012 and 15 in 2013. Authorities have sought to attract more listings through programmes such as the “One Tambon, One Listing” scheme (a tambon being a sub-district administrative unit), which registered 100 companies that led to 10 listings on both the MAI and the main board. The combined 38 listings on the main board and the MAI in 2013 raised a total of BT191.60bn ($6.27bn), nearly double the SET’s target of BT120bn ($3.9bn) for the year. “We have seen a steady flow of initial public offerings (IPOs) from a variety of sectors in the past two years,” Kasem told OBG. A handful of additional companies listed in early 2014, with two joining the main board and one the alternative board as of late March 2014.
Notable recent IPOs included airline companies such as Nok Air in June and Bangkok Airways in July 2013, as well as restaurant operator MK in August 2013, and solar energy companies like SCPG, Gunkul Engineering, CK Power and Energy Absolute (in October 2012). Property fund IPOs have also accelerated, launched by property, shopping mall and hypermarket developers to dispose of maturing assets and raise funds for future developments. Meanwhile, the first IPO for an infrastructure fund, carried out by Bangkok sky-train operator the Bangkok Mass Transit System in April 2013, has unlocked plans for a range of funds (see analysis). Although most IPOs have proven successful upon listing, two property-firm listings bucked the trend: Ananda Development (listed in December 2012) and PACE Development (in August 2013) were still trading below their listing price as of late March 2014.
It normally takes around four months for the SEC to approve an IPO, and Interest in listing comes from a range of sectors, although some, like agriculture, remain under-represented. “Agro-processing firms tend not to list publicly as the market is quite fragmented and they do not see a need to list,” Kasem said. The exchange is also seeking to attract foreign firms to issue DRs on the Thai market. Firms like Taiwan’s Calcom have issued DRs in their home markets based on underlying assets in Thailand, but the SET hopes to attract such listings itself.
The value of outstanding bonds has grown nearly 70% from end-2008 to BT8.9trn ($291bn) by June 2013, an 11.8% y-o-y increase, according to the Thai Bond Market Association (ThaiBMA), the self-regulating organisation that marks bond prices. The market remains dominated by government bonds and Treasury bills, which accounted for 36% of outstanding bonds in June 2013, and by state-owned enterprise and BOT bonds, accounting for 43%. Government bonds are the most widely traded fixed-income securities, accounting for some 80% of daily trades, according to Citibank.
With 13 licensed primary bond dealers, each accounting for over 5% of daily bond market turnover, the Ministry of Finance’s Public Debt Management Office (PDMO) has developed a deep and liquid domestic market able to fully finance government debt. In 2012 alone the government issued BT687bn ($2.5bn) in debt. In the three years to 2010 the PDMO lengthened the average maturity of government’s debt portfolio from 5.7 years to 7.6 years and increased the share of floating debt from 10% to 18%.
The types of tradable bonds have broadened as well, with 50 different government security tenors in circulation by 2013, including a first 10-year inflation-linked bond, bonds marketed to retail investors and a 50-year bond since 2011. The first government 25-year amortising bond, which pays down the principal in instalments, was introduced in 2013. The Thai bond market attracted its first non-resident government bond issue in 2013, when the Lao government floated BT1.5bn ($49.05m) in debt in Thai baht to finance its infrastructure projects, and it aims to raise an additional BT3bn ($98.1m) in 2014.
trong interest by domestic and non-resident investors has driven the yield range on government bonds from 2.5-7% to a narrower 3-4% since 2010, according to Credit Suisse, although yields rebounded to 4.2% by August 2013 following a foreign portfolio outflow of some BT95bn ($3.1bn) in June alone, according to the ThaiBMA. Given that FPI accounted for 15.8% of government bond holdings by end-2012, as compared to roughly 30% in Indonesia and Malaysia, according to Fitch, the outflow proved less destabilising. The PDMO is forging ahead with market development. Beyond extending the maturity of its inflation-linked bonds with a 15-year issue in 2013, the government intends to switch or consolidate illiquid bonds into longer-dated paper in higher demand in 2013-14 in order to reduce refinancing risk, extend the average debt maturity and improve market liquidity.
In May 2011 the PDMO allowed the cities of Bangkok and Pattaya (and select local governments) to issue bonds, although these would not benefit from a sovereign guarantee – the full regulatory framework was still being negotiated between the Ministry of Finance and the Ministry of the Interior. Meanwhile, following new SEC rules on sukuk ( Islamic bond) issues in 2011 the state-owned Islamic Bank plans such an issue in the coming year.
Given the government’s plans to pass a BT2.27trn ($74.2bn) off-balance-sheet infrastructure spending programme in late 2013, market participants were expecting higher public-sector bond issuance in different maturities of up to 30 years over the medium term. “Increased government borrowing could place upward pressure on rates, but the extent of the pressure should be manageable,” Credit Suisse noted in an April 2013 report on the planned infrastructure programme (see Economy chapter). Following delays, the enactment of the government’s flagship infrastructure fund was subsequently halted by the Constitutional Court in March 2014, however.
Corporate bonds, accounting for about 20% of the total in June 2013 (BT1.75trn, $57.23bn), have proven to be an attractive alternative to bank financing for blue-chip corporates covered by one of the two local credit ratings firms (Fitch and TRIS). “There is a clear disintermediation trend as banks lose market share to bond market financing and the asset market through property and infrastructure funds,” Pimpaka told OBG.
Kobkiat Boontherawara, CEO of AEC Securities, told OBG, “Increasingly, Thai corporates are going to the SET to raise funds and this is partly because banks are more careful in their lending and are insisting on more collateral. A decade ago, bank loans exceeded equity volumes two-and-a-half times, whereas today market capitalisation slightly exceeds outstanding bank loans. So things are balancing out.”
Whereas the PDMO has sought to increase the share of floating-rate bonds to leverage falling yields in recent years, corporations have remained more conservative. “Thai corporates tend not to like floating-rate debt, opting for fixed-rate debt instead,” Wong told OBG. The past year saw a rise in corporate issuance, following on from a successful year in 2012, when BT500bn ($16.35bn) in new issues were released. Banks were a key driver, accounting for one-third of 2012 issues by value, as they raised their Tier-1 and Tier-2 capital buffers.
While total corporate bond issuance eased in the first half of 2013, this was mainly due to a slowdown from the banking sector, as most banks had issued a high volume of Basel II-compliant capital debt instruments during 2012 before the more stringent Basel III requirements took effect on January 1, 2013. “While there was a slowdown in the total value of corporate bonds issued in the first seven months of 2013 as compared to 2012, the number actually rose when one excludes banks’ Tier-1 and Tier-2 capital raising in 2012,” Ariya Tiranaprakij, ThaiBMA’s executive vice-president, told OBG. “In fact, 14 entirely new issuers came to market in 2013.” Indeed, the first half of 2013 witnessed issues by 55 companies, up from 50 in 2012, although at lower values. The PDMO also removed restrictions on nonresident corporate bond issuers in September 2012, granting permission to seven firms, including Citibank, which launched a BT10bn ($327m) bond in late 2012. By June 2013 some BT114bn ($3.7bn) in foreign bonds were in circulation, roughly 1% of the total, driven by issues from Korean banks and the Asian Development Bank in particular.
The corporate bond market remains dominated by domestic retail investors, which accounted for roughly 50% of outstanding corporate bond holdings in June 2013, according to ThaiBMA. Foreign investors have clustered in larger corporate issues. “The key difference with other Asian markets is retail investors’ strong appetite for corporate bonds,” Ariya said.
Regulation & Promotion
Both the exchange and the regulator have increasingly focused on developing the market, alongside their supervision functions. Under new management since 2010, the SET has concentrated on technical upgrades, product innovation, and expanding the pool of local and foreign investors. The SEC has worked closely with the Association of Securities Companies (ASCO) to strengthen market oversight, with a particularly high-profile indictment for insider trading in June 2013. Noting improvements in timely disclosure by listed firms, market oversight, and accounting and auditing transparency, a 2012 study by the Asian Corporate Governance Association and regional broker CLSA ranked Thailand third in Asia after Singapore and Hong Kong for capital markets governance.
In September 2012 the SET launched its new SET Connect trading platform, developed by Sweden’s Cinnober Financial Technology, that allows for high-frequency trading. It also installed a new energy-efficient Cisco data centre in mid-2013 to support the growth in online trading. Meanwhile, the SET continues to launch new products, particularly derivatives, although newer instruments have not always generated the desired liquidity (see analysis).
With support from the SEC the exchange also launched its electronic trading link with Malaysia and Singapore in September 2012, allowing brokers to trade stocks on any of these markets from their home jurisdiction. Although the linkage did not immediately bring new liquidity, the full effect is only expected in the medium term given that foreign institutional investors already had full access through local counterparties.
Meanwhile, brokers like CIMB and Maybank Kim Eng Securities are already present in all major ASEAN markets. “I think the linkage of exchanges makes the most difference for retail investors,” Praoporn Senanarong, director of the SEC’s strategy and planning department, told OBG. “As such, we will only see the impact materialise over several years, as brokers educate investors and invest in marketing.”
The SEC also inaugurated a new class of domestic high-net-worth retail “accredited investors” in April 2013, for those with over BT50m ($1.64m) in investable assets and BT20m ($654,000) invested in securities, allowing them to invest in as broad a set of instruments as institutionals. “Invested assets by high-net-worth individuals have grown significantly in recent years,” Pimpaka told OBG. “They have become more sophisticated, focusing on fundamentals rather than pure speculation.” Although non-resident investors from countries with a dual-taxation treaty with Thailand are exempt from capital gains tax, the SEC is working with the Revenue Department to wave such taxes for domestic retail investors.
Expanding The Investment Pool
Broadly speaking, the authorities are seeking to expand the pool of domestic investors and attract new foreign ones. “One of the SEC’s key strategies since last year has focused on investor education and the concept of asset allocation based on investor objectives and profile,” Praoporn told OBG. The SET and larger retail brokers have launched investor education roadshows both domestically and internationally. The exchange established investment centres at seven universities and has expanded the scope of its international roadshows to markets such as Canada, Australia, Japan and Scandinavian countries, increasingly targeting retail investors offshore.
The total number of broker accounts has risen by nearly one-third during the recent bull market, from 674,000 in July 2011 to 990,286 as of February 2014, of which roughly a fifth are active, according to statistics from the SET. Meanwhile, the number of internet trading accounts reached 618,552 in February 2014, of which 21% are active.
With 38 SET member brokerages, the market remains fragmented despite the top 10 houses commanding 57.05% of turnover in 2012. Some 22 brokers produce research on a regular basis, but only a handful provide forecasts up to three years. In spite of a 49% cap on foreign broker ownership, the market hosts major foreign houses like UBS and Credit Suisse that rank among the top 20. Larger retail brokers such as Maybank Kim Eng (with 11.86% of 2012 trading by value), Kasikorn Securities (5.93%) and Country Group Securities (5.53%) rank in the top five, while brokers like CIMB, SCB Securities and DBS Vickers are the leading institutional brokers, though both have expanded their retail accounts of late.
Banks’ securities subsidiaries are increasingly cross-selling products through their affiliated branch networks. “Large retail brokerages like Kasikorn Securities have been leveraging their affiliated banks’ distribution channels to cross-sell securities trading services through ATMs, for instance, and drive retail participation,” Kasem said.
Brokers are also marketing their online trading platforms to boost retail participation – although online trading commissions are five to seven basis points lower on average, overhead is lower too. While the number of active internet trading accounts has grown to roughly 130,000 as of February 2014, no purely online brokers have entered the Thai market as they have in Indonesia, where two e-brokers featured amongst the top 10 in 2012.
“Our regional study of broker fees prior to full liberalisation found that Thai rates were already quite competitive,” Ekapon Sawaengsri, the director of the SEC’s research department, told OBG. Although brokers’ commission structures were gradually liberalised for institutionals in 2010 and retail investors in 2012, leading to a roughly 30% fall in institutional fees to lower than 20 basis points, the doubling of daily trading volumes in the year to 2013 sustained revenues among smaller brokers.
Price discipline on retail rates was maintained, however, with an SET ceiling of 1% in 2010-11and average commission of 0.18%. “Despite partial liberalisation of commission structures, price discipline has been maintained through the self-regulation of the ASCO,” Maybank Kim Eng’s Montree told OBG.
“In fact, brokerage revenues have grown significantly on the back of the market upswing since 2012.” Total brokerage fees reached BT22.6bn ($739m) in 2012, according to ASCO. Despite a high number of brokers with less than 1% market share, the industry has avoided consolidation.
“Liberalisation of commissions did not spur consolidation amongst brokers as was originally expected,” Pimpaka told OBG. “Growth in trading volumes in recent years supported revenue growth, while many smaller brokers are often owned by their clients, which also hinders mergers and acquisitions.”
Since its start in the 1970s, the local asset management industry has grown significantly in recent years, at a compound rate of 12.5% in the five years to 2013, according to Deloitte, with BT2trn ($65.4bn) in retail assets under management (AUM). Although there were 23 licensed asset managers as of September 2013, including many foreign-owned ones, the market is dominated by bank subsidiaries, which have a market share of 75% for equity funds and 50% for bond funds, according to Deloitte. The strongest growth has been in mutual funds, whose share of AUM rose from 20% in 2007 to 33% by 2012, according to Deloitte. The upfront tax deductibility of investments in long-term (over five years) equity mutual funds has also encouraged retail investors. Asset managers have launched 16 exchange-traded funds (ETF) since 2007 – including five gold ETFs, two foreign equity funds and nine domestic equity funds – and their appeal has been due to the low broker commissions of 0.1%.
While equity mutual funds have gained market share from the traditionally dominant bond funds, which still accounted for roughly 60% of total mutual fund holdings by August 2013, according to Citibank, trigger funds that follow strict stop-loss measures gained traction in 2013. “Trigger funds have gained popularity this year,” Kasem told OBG. “In volatile markets, such funds impose discipline on retail investors.” Brokers have also launched a growing number of private funds to capitalise on volatility and growth across asset classes. “Brokers are increasingly launching licensed private funds, which give them the flexibility of pursuing multi-asset class strategies,” Pimpaka told OBG. While investors began to pull out of equities from June 2013 onwards and moved into the relative safety of money market funds investing in Treasury bills, brokers see this as a short-term response.
Following the BOT’s liberalisation of controls on individuals’ offshore investments in 2010, allowing individuals to invest up to $20m offshore, asset managers have launched a number of funds focusing on offshore investment. “We have seen a growing number of local funds dedicated to investing offshore in foreign fixed-income markets, first in Brazil, then in the Middle East and more recently in Turkey,” Dol Watanasri, Citibank’s securities country manager, told OBG. The central bank also removed the $50m ceiling on offshore portfolio investment by Thai corporates in June 2013. As bank deposit insurance is gradually reduced from BT50m ($1.6m) currently to BT1m ($32,700) in 2016, the appeal of the asset management industry is set to grow, attracting competition from foreign fund managers.
Buoyed by the same wave of Western money that bolstered bourses in emerging markets globally in recent years, Thailand was not immune to the correction from June 2013 onwards. As panic subsides, global investors will discern between those markets with significant economic imbalances and those, like Thailand, with sound fundamentals.
The kingdom’s large domestic investor base, with strong retail participation, is a sound basis for future expansion. Although the growth of corporate earnings will slow from its peak in 2012, the outlook for Thai equities remains strong. Valuations are attractive for investors with an eye on the long term, although there may be some turbulence in the shorter term due to ongoing volatility in the political arena. Nakorn Kolsrichai, the managing director of Aira Securities, told OBG, “Savvy international investors understand that the country, despite periods of political unrest, demonstrates solid and consistent fiscal and monetary policy.” Kobkiat of AEC Securities added, “Because of the political unrest, Thailand trades at a discount to the other markets in the region. As soon as there’s a positive catalyst, like a political agreement, we expect to see plenty of market activity as equities are cheap and this will present an opportune time to buy in.” In the meantime, the priority for authorities will be to reduce costs and further streamline regulations to promote liquidity in a growing array of financial instruments.