Sep. 11–What’s with the SET? I have received this question from several of my money manager friends. After all, while most markets around the world have had rallies, Thailand has been on a tear,rising 57 percent this year alone.
For foreign investors who have been overweight on the Stock Exchange of Thailand in their portfolios, this has been welcome news. For those who have not, they are trying to make sense of this move.
It is interesting to see how people try and justify short-term moves in the market. Foreign investors will sometimes make generic comments: “The market’s narrow, it’s speculative, it’s all locals punting the market”, and so on.
Interestingly, local commentators constantly try to justify even intra-day price moves. The drop on Tuesday was attributed to a Sars case in Singapore, among other things.
While I do not begrudge analysts and brokers having to come up with daily reasons for the daily market moves, and one has to tolerate comments from foreign investors, the reality is pretty basic.
While long-term investing is all about buying something where there is perceived value with the assumption that the stock price will rise and accurately reflect that value, short-term investing and market moves are something very different.
Markets move in the short term mainly on the back of psychology. This has an impact on liquidity that has the strongest short-term effect on market performance. So, explaining short-term moves is a bit of a moot point.
Investor psychology and emotion take hold and propel markets (or individual securities) in whichever direction. Eventually markets find equilibrium based on some fundamentals but that equilibrium can take time.
But this week’s column was actually meant to follow up on a couple of readers’ questions about the benefits and costs of investing offshore.
With the Bank of Thailand’s recent liberalisation — permitting institutions to invest offshore — there has been some comment. As noted before in this column, I feel this is an excellent policy move. If anything, it should go further and permit the investment in foreign stocks and alternative assets such as private equity and hedge funds as well.
There are several benefits to the investor, whether an institution or an individual. First, its about diversifying the portfolio. Growth in capital markets in Thailand has simply not kept pace with growth in liquidity. By investing overseas, a portfolio is able to hold a variety of assets (under ideal conditions, not just bonds) with different investment time frames and different return targets.
Second, it is about reducing the portfolio’s risk. Most portfolios are heavily weighted toward local bonds where returns have collapsed (especially at the long end) and volatility (and risk) has increased. Frankly, if I want to take that sort of volatility, I want to be compensated for it in terms of yield and there are several overseas bonds with better yields.
Third, linked to the above, it is about maintaining a reasonable return target for the portfolio. It is great that the SET is up 57 percent. But a tremendous return today can likely mean a lower return tomorrow. Setting achievable return targets over a longer period of time can be helped by having a foreign component to a portfolio.
But as noted in an earlier column, offshore investing is not about getting a free lunch. Local investors (whether institutional or individual) have an information edge at home that they may not have offshore.
An information edge is not always necessary but having traded foreign stocks and bonds for institutions in several markets, I can confirm that it helps.
Also, there is the issue of cost. If you are getting an offshore fund manager to manage your portfolio, think about the issues mentioned above but also think about the cost charged by the manager. Your targeted net return should be attractive enough.
And then there is the currency issue. Do you hedge your exposure to the foreign currency or not? With the baht’s strength currently, certainly a near-term hedge is worth establishing. But a hedge is not always necessary or recommended, or what’s the point?
Whatever the issues, the net result is that foreign investment will be the catalyst for better portfolio construction, better returns over the long run and an increasingly broader approach to money management as it exposes investors to new instruments, new securities and new markets. All good for the investor.
The author can be reached at [email protected]
—–
To see more of the Bangkok Post, or to subscribe to the newspaper, go to http://www.bangkokpost.com
(c) 2003, Bangkok Post, Thailand. Distributed by Knight Ridder/Tribune Business News.
