Weekly Market View (August 18 - 22, 2008)

Economic
US: Producer Price Index (PPI) rose 1.2% in July, whereas housing starts and construction permits decreased by 11%, and 17.7% respectively. Market was concerned about the inflation which stayed at the high level, while housing market continued to slow down.

Europe: The Euro zone economy recorded a trade deficit of EUR0.1bn in June due to higher oil import, but the export to the US reduced. In Germany, Producer Price Index (PPI) increased 8.9% in July, the highest increase in 27 years, due to soared energy prices.

UK: British retail sales unexpectedly jumped by 0.8% MoM in July (market expected a 0.3% drop) even as retail prices hit 10-year high at 1.6% YoY.

Japan: BoJ maintained its policy rate at 0.5% as expected.

Thailand: The Finance Minister said that the MoF were preparing to propose new economic stimulus measures to the economic policy committees meeting, which would be held on 27th August. The objective of the measures was to support 6.0% economic growth target. Reuter’s poll reported that analysts expected the NESDB to report an economic growth of 5.7% YoY in 2Q08, shrank by 1.0% QoQ, and they further expected the MPC to hike rate by 0.25% to 3.75% during the meeting. For July’s external sector, total exports rose 43.9% YoY, a value of USD16,957mn as exports to new markets expanded by 56.1%, resulting in increasing the proportion of new market to 50.7%. Imports, increased by 55.1%, accounted for USD17,984.3mn. Thailand imported more energy (98.2%), capital goods (36.3%), and raw materials (52.9%) causing July’s trade deficit of USD1,026.9mn.

Fixed Income Market
THB bonds retreated after six-week rally. Bonds tumbled as yields rose 15-20bps by end of the week as market expected the BoT would hike rate to fight with rising inflation. THB/USD strengthened back to 33.90 after the BoT intervention.

Equity Market
SET plunged this week with renewed worries about trouble at major US mortgage backers and more related write-downs to come. Baht weakness, which was in line with regional currencies, has partly led to foreign selling this week, though trading turnover pared to very low level. Political uncertainties at home also weighed down buying interest. Optimism driven by relatively strong 2Q08 results was over. Also, satisfactory banks loan growth could not encourage heavy buying interest. Meanwhile, commodities stroked back this week with oil price gaining as much as 7% to two weeks high on weakening USD as well as rising geopolitical tension between US and Russia.

Sources to Learn about Investing Basics

Thai investors need to learn more about investing in different assets, now

In the past one year, I have run into a number of my parents’ friends and relatives who have been affected by our government’s policy of low interest rates. These elders are suffering greatly as their interest income from bank deposits diminishes swiftly. What they receive now – at their retirement age – is only a fraction of what they used to get a few years ago.

I have sympathy for them, and a lot of other fellow Thais, who never had a chance to learn much about investing. They put most of their life-long savings in bank deposits and jewelleries or antiques, which have low liquidity.

Our government has shielded our economy from the global economic environment for so long that we never needed to learn about how to invest properly. For us, bank deposits were the only means to save and grow our money.

For those of you who still have time to study and make a difference to your personal wealth, I would recommend that you spend some time learning about investment. You will find that the sooner you know about it, the better off your future will be.

If you have access to the internet, the websites below are excellent starting points.

www.fool.com

www.money.com

www.schwab.com

www.thestreet.com

www.ici.org

Since these are all American sites, you will find that some of the terms and topics are irrelevant in Thailand. You may also notice that all of them discuss at length about investing in stocks, college planning and retirement planning, the concepts of which are quite alien to most of us here.

Locally, there are not many sites that provide basic lessons. The best one I have found so far is www.thaibdc.or.th, which gives basics on bonds. Others that either provide statistics or some original articles are:

www.bot.or.th (The Bank of Thailand)

www.sec.or.th (The Securities & Exchange Commission)

www.mof.go.th (The Ministry of Finance)

www.thaifin.com (personal finance site)

www.silkspan.com (financial superstore)

www.qthai.com (financial news and information)

If you don’t have access to internet, you can also find the following (English) books worth reading. (You should be able to find them in bookstores specialising in foreign publications.)

‘Investing for Dummies’, by Eric Tyson

‘Rich Dad’s Guide to Investing: What the Rich Invest in That the Poor and Middle Class Do Not!’, by Robert T. Kiyosaki and Sharon L. Lechter

‘The Wall Street Journal Guide to Understanding Money & Investing’ by Kenneth M. Morris, Alan M. Siegel and Virginia B. Morris

‘Mutual Funds for Dummies’ by Eric Tyson

Again, these books are written in the American context, but you can still learn a lot of basic investment practices from them.

You will find that the above-mentioned websites and books have some similar lessons and concepts:

Before investing in anything, always set your investment objectives and evaluate your own risk profiles first

Diversify your investments in various asset classes such as bank deposits, bonds, stocks, gold and properties

Invest some of your assets for longer term to reduce short-term fluctuations

By learning about proper investing, you will be better prepared for cyclical economic downturns that will most likely hit Thailand again in the future. The sooner you start, the better. As I have read somewhere that “the best time to invest your money was yesterday!”

Becoming a wise investor in the SET

An introductory insight to creating a long-term wealth

Many people have asked me whether it is the right time to jump into the stock market. My usual answer is, “I don’t know”.

This is based on my having no information about the individual who has sought my opinion. I don’t know what he/she likes, what he/she expects from investing in the stock market, what his/her long-term financial goals are, and most importantly, to what degree of risk this person can withstand.

Investing in stocks is riskier than putting money in a bank or buying a bond. You may get richer, gaining a profit of over 50%, in a week, or you may become poorer, seeing your stock value tumbling down by 50%, in a week as well. So, unless you can ensure that such potential loss, if it happens, will not give you a heart attack or make you commit a suicide, you’d better stay away from the stock market.

I believe that wise investing in the stock market can contribute to everyone’s wealth creation in the long term. Amongst the different asset classes, stocks typically offer the best way to beat inflation. Earnings of most listed companies will keep increasing when their businesses expand. These will be reflected in higher stock prices and more dividends.

Many people would disagree with me and say that investing in stocks is similar to gambling. In fact, they are alike in many ways.

First of all, they both involve risks. That is, gamblers and stock investors cannot accurately predict the outcome with great confidence. If it turns out to be a profit, they would claim that they have done their homework well. However, if it turns out to be a loss, they would blame it on the stars and fate!

Secondly, you rarely hear the “bad news” or losses. When was the last time you heard people say they lost their money in a bet, be it a football pool, a state lottery or an underground one? Similarly, stock investors normally brag about their profits, but always keep mute about their losses. They often say their stocks are for long-term hold when the prices move south.

Thirdly, both gamblers and stock investors are addictive to their activities, which they claim to be their main source of income. They often spend time discussing about them with friends in hope for getting to hear more “predictions” from well-known astrologers.

To me, stock investment can be considered gambling or full-fledge speculation when investors buy only on hope and not on sound knowledge of the underlying stocks. Once they randomly commit their money into something based only on instincts, they are immediately engaging in taking unnecessary risks.

In Thailand, it is unfortunate that there are more stock speculators than investors. As reported by the Stock Exchange of Thailand (SET), over 60% of market participants are retail investors who seek quick profits. They rely very little on fundamentals of stocks and depend more on the “hot tips” that they receive from their brokers. We often hear about investors who trade a single stock 2-3 times in a day – they buy on rumours and sell on facts!

I doubt that these speculators can achieve their financial goals, either short-term or long-term, by trading stocks in the SET. Quick profits, if any, can entice them to go into the market more often. However, just like gambling, it is more likely that their luck will run out someday. In addition, few speculators would factor the brokerage fees into the calculation of net profits.

Having said all that, I find that speculation is not all bad if it is in the right proportion. In your stock portfolio, there can be a few stocks that you can hold for more than three years, a few that you hold for a year, and a few that you plan to sell in a month. As long as you know exactly why you buy or sell each stock, and the proportion of speculative stocks is less than 25% of your portfolio, you can consider yourself an investor.

Some of the basic knowledge you should have before investing in a stock:

• What does this company do? Why is it a good business to be in?

• How is the competition, locally and internationally?

• What is its earnings forecast? What has been its track record?

• What will impact its earnings; i.e. oil prices, exchange rates? To what extent?

• How is its management? How transparent and effective are its policies?

• How liquid is this stock?

• Is the current price attractive? Why?

• When will you sell the stock? Why?

If you have all the answers to the above questions, you can be certain that you are becoming more of an investor than a speculator. Prudent investing will reduce risks and give you a better chance of winning the war – or achieving your financial goals – instead of just winning a battle – or gaining short-term profits.

Reprinted with modification from 'Money Matters', a weekly column written by Reungvit Nandhabiwat, former managing director of AYF, for the Bangkok Post.

December 6, 2000

Investing: ETF And CEF

By Michael Russell

If you're looking for a more cost-effective instrument, you may want to consider exchange-traded funds (ETFs), which have been described by US supporters as revolutionizing the world of investing, with their low expense ratios and ease of transaction. Another pooled-investment tool that shares cost-effective similarities with ETFs is closed-end funds (CEFs).

ETFs are baskets of stocks or bonds that trade on a stock exchange, just like shares. ETFs are unique because of their indexing feature. Just like an index unit trust fund, ETFs aim to track the performance of a benchmark.

ETFs are also unique in that they have market makers. Usually, investment banks work behind the scenes to create or redeem ETF units. So, don't look at the average trading volume as a reflection of liquidity. Market makers are there to create or redeem units based on demand.

A lower expense ratio is most commonly cited as the ETF's greatest advantage. Another positive feature is flexibility. Like stocks, ETFs can be bought and sold at on-the-spot prices. It's a very transparent investment. Even if there is a premium or discount, it will be very small and will quickly narrow.

However, ETFs don't necessarily provide better returns. As it tracks an index, ETFs will only do well when the underlying stocks or bonds perform well. When the reverse happens, the ETFs will do just as badly. Thus, investors are still subject to market risk and volatility.

What is considered as the biggest benefit can also be a drawback. As the investor incurs a trading fee each time he buys or sells units, the costs add up when more transactions are made, eventually eroding any cost benefits. Therefore, investors are not advised to trade ETFs frequently.

A CEF is essentially a fund that has a fixed number of shares and trades on the stock exchange. However, it is a company and is governed by company law. Investors are regarded as shareholders. Because they are listed on the stock exchange, like shares, the price and liquidity of CEFs are determined by market demand and supply.

CEFs have a fund management team that works towards the funds' objectives. As CEFs are normally smaller than unit trust funds, some believe 'active management' of the fund is easier, thus allowing them to perform better.

As a listed entity, the buying and selling of CEF units are done between investors on the stock market. This way, the base capital of a CEF is fixed and management can focus on investing without worrying about investors leaving or coming into the fund with large sums of money.

CEF investors also enjoy the same price flexibility as ETFs as CEF units are traded at whatever price it happens to be at during the day. Unlike ETFs, CEFs can invest in foreign-listed securities with the approval of shareholders and the Securities Commission. CEFs don't need to market or distribute their funds and cost savings on these expenses can be quite hefty.

However, as a listed security, the price of a CEF is determined by market sentiment. So, there is no assurance that CEFs will trade at their NAVs. In contrast, ETFs have fund houses and market makers respectively, to ensure that their units trade close to their NAVs. As with ETFs, CEFs are subject to market volatility and risk. Price changes may be temporary or extended and these changes can impact the CEF's NAV.

While there are risks and benefits, the existence of these investing instruments provides investors with a choice.

Michael Russell

Foreign Investment Fund

It’s no secret that many ‘well-to-do’ Thais have bank accounts offshore. However, it’s a taboo subject because, as part of the Bank of Thailand’s exchange control regime, cash remittances for overseas investment are prohibited. Even to send money abroad for other matters such as your child’s education, you need a lot of supporting documents. So, how do people buy houses, condos, stocks or other assets offshore?

A number of wealthy Thais have found ways to get around the ban. Surely, it is not perfectly legal. Once there, the money can be taken care of by private bankers. It is thus a common apparition to find these nice-looking executives discussing investment alternatives with their high-net-worth clients over lunches and dinners at leading hotels in Bangkok, particularly after the de facto devaluation of the Baht in 1997.

So, what do the ‘normal’ Thais, who don’t have access to these foreign private bankers, do with their investments? Unfortunately, they have to stick to those offered locally – plain-vanilla bank deposits, bonds, stocks and mutual funds.

Things will change soon. For the first time, ordinary local investors will have a chance to legally take the money out to invest in foreign capital markets. This is through the Foreign Investment Fund (FIF), a local mutual fund whose investment policy is to invest all of its assets overseas.

Initially, the Bank of Thailand and the Securities and Exchange Commission (SEC) approved five asset management companies to set up and manage five FIFs. Each has a quota of US$ 40 million to remit by the end of 2002.

The five investment programs

The asset management companies will launch funds with different underlying assets in May 2002 as follows:

Asset Mgmt. Company	Ayudhya JF Asset Mgmt.	ING Mutual Funds	MFC Asset Mgmt. PCL	One Asset Mgmt.	K-Asset Mgmt.
Investment assets	Global convertible bonds	Asian bonds	Global equities	Global Balanced	Global Balanced
Structure	Feeder fund	Direct investment	Direct investment	Fund of funds	Feeder fund
Foreign partner/advisor	JPMorgan Fleming Asset Management	ING Group	Wellington Management	Frank Russell Investment, Deutsche Asset Management and Morgan Stanley	Merrill Lynch Investment Managers
Minimum investment	Bt. 100,000	Bt. 2,000	Bt. 10,000	Bt. 50,000	Bt. 100,000
Subscription dates	8-9 May	7-14 May	8-24 May	2-9 May	15-17 May
Redemptions	Semi-annually on 1st business day of Jan. & Jul., starting Jul. 03	Semi-annually on last business day of Jan. & Jul., starting Jan. 03	Every 3 years, starting 2nd quarter of the 4th year after the IPO	Monthly, starting 1 year from the Fund’s registration date	Annually, on last business day of Jun., starting Jun. 2007
Dividend policy	No dividend	No dividend	At least once a year at the rate no less than 30% of profit	No dividend	No dividend

Source: Five asset management companies

Terminology

Convertible bonds	Bonds that give the holder the right to convert or exchange the par amount of the bond for stocks of the issuer at some fixed ratio during a particular period.
Asian bonds	Bonds whose issuers are governments or companies in Asia
Global balanced	A portfolio of both equities and bonds
Feeder fund	A fund that invests in another fund
Direct investment	Investment into underlying stocks or bonds directly
Fund of funds	A fund that invests in other funds; i.e. equity fund(s) and bond fund(s)

After the funds are offered to the investors during the initial subscription period (IPO), all the five fund units will be listed on the Stock Exchange of Thailand. So, investors who need to sell the units can do so via their brokers.

Who should invest in these funds?

You should also seek and understand the details of how each fund will provide you with returns. For example, you should look at how much the fund is charged by the local asset management company, its foreign partner(s), the overseas custodians, the trustees and the administrators. These will affect the underlying performance of the fund.

Conclusion

Upon acceptance of all the fine details given in the respective prospectuses, you should understand that these new products will allow you to diversify your risks and at the same time enhance your profit potential. But, like other local products, there are risks involved, and you must understand them before committing any money in them. In any case, only a portion of your savings should be invested in these funds.

If you would like to have exposure in foreign capital markets like the wealthy ones, the FIFs will be your chance to do it legally.

Weekly Market View (August 4 - 8, 2008)

Economic
US: The Federal Reserve (Fed) kept it policy rates unchanged at 2.00% as expected, and signaled that it would not raise rates in the near future. Reuters’ poll reported that market expected the Fed would keep its policy rates steady for the rest of the year.

Europe: The ECB left its policy rate on hold at 4.25% as expected. The ECB President expected euro zone growth to weaken this year, while inflation was expected to stay above its target. Rising oil prices pushed euro zone producer price index (PPI) up by 8.0% YoY in June, while pulled retail sales down 3.1% YoY, as high oil and food prices squeezed consumers’ purchasing power.

UK: The BoE held its benchmark rates at 5.0% as expected and signaled that it would leave rate on hold for a while.

Japan: Government monthly report showed that Japanese economy might get into recession. Reuters’ poll pointed out that market expected economy to shrink by 0.6% in 2Q08.

China: The State Information Centre expected the China economy to expand 10.2% in the third quarter, after expanding 10.6% and 10.1% in the first and second quarters respectively. The growth would be supported by the government policy, which heading toward sustaining growth.

Thailand: The Finance Minister Surapong Suebwonglee said that he expected August and September inflation would be closing to July’s, which was at 9.2%. He expected the inflation would be gradually declined in the fourth quarter of this year. He also kept his projected GDP08 at 6.0%. However, the BoT Deputy Governor Atchana Waiquamdee commented that its fight with inflation was not over yet, while the latest government economic stimulus package might not help supporting growth as expected, as oil price remained at high level. The Finance Minister commented that the policy difference would not lead to firing the BoT Governor or intervention of the Monetary Policy Committee (MPC). However, if the difference is so wide, one policy must stay, and the other must be off. He also commented that it is difficult to move the rate up as he did not expect inflation to hit double digits. The Center for Economic and Business Forecasting, University of the Thai Chamber of Commerce raise its GDP08 forecast up from 5.1% to 5.6%, as exports was expected to grow robustly.

Fixed Income Market
Yield dropped 3 - 15 basis point across the curve during the week due to substantial declined in oil prices which help easing the inflation concerns over 2008. Thai Finance Minister Surapong commented on Friday that he saw low possibility of rate hike in August. If the BoT still raises rate, it would intensify conflicts with the Finance Ministry, which wants growth-accommodative monetary policy. On other hand, if the BoT keeps rate steady, it could raise questions about its independency and credibility. Whether or not the MPC raises rate at August 27 meeting, most economists still expect further tightening of 25-50 basis points by year-end.

Equity Market
Market commenced the week with retreat to the low at 660 points on selling energy sector as oil price dropped and record US unemployment. However, the sentiment has improved considerably as the Fed held rates unchanged as expected with easing inflation outlook and signaled no rate increase soon. Speculation for return of political normalcy also drove the market up. Thaksin and his wife were expected to go into exile after the wife found guilty on tax evasion case and Thaksin's land graft case verdict approaching.

Fixed Income Mutual Funds

An Alternative for Retail Investors

By constructing a simple portfolio of bank deposits and various bonds, investors could increase their overall investment return to outperform the yields earned from their bank deposits. However, direct investments in bonds were not readily accessible to everyone – most retail investors cannot afford to participate in the bond market. A purchase of government or state enterprise bonds, via banks and financial institutions, requires at least 100,000 Baht for a single bond issue. Worse, most corporate bond issues require at least ten million Baht per investment.

Even if investors have more than ten million Baht to invest, should they invest in only one corporate bond? I do not recommend so. Holding one bond of any issue is extremely risky because, if the bond issuer runs into a financial difficulty and cannot repay either principal and/or interest, the investors would lose all the investment there. Thus, it is always a safer strategy to hold at least few bonds in your portfolio just to spread the risk.

So what is the alternative for retail investors who are not millionaires and seek higher returns generally offered by bonds while limiting the risks?

My answer is fixed income mutual funds. They can be purchased for as little as 2,000 to 10,000 Baht, depending on the minimum purchase policy set by each asset management company.

A mutual fund is an investment vehicle established by an asset management company and sold to the public. When individual investors purchase ‘units’ of the fund, it means that they have agreed to the investment guidelines of that fund and are entrusting the asset management firm to manage their pool of money for them. The firm’s team of experienced fund managers will determine where the money is to be invested, and monitor the risks and performance of all investments for investors.

In the case of a fixed income mutual fund, the fund manager will invest the pool of money in bank deposits, bonds and other fixed income instruments. The fund will receive interests and gains from these investments, and in turn give the investors returns in the form of dividends and capital gains. That is, when the investor buys a fixed income mutual fund, he/she will expect to see its unit price, or Net Asset Value (NAV), go up. The rate at which it rises can be compared to the yield that he/she gets from bank deposits or bonds in the same period of time.

Owing to the large size of money that the funds have (i.e. from 100 million to 30 billion Baht), the fund managers can shop around for the highest deposit rates; can buy many different bond issues therefore spreading the risk; can get the best deal on new bond issues; and, can reduce the transaction costs as they trade in large lots. Furthermore, they have access to instant news, enabling them to respond immediately to market situations.

In Thailand, fixed income mutual funds also enjoy tax privileges that retail investors do not have. While banks and bond issuers deduct 15% withholding tax when paying interests to individual depositors/investors, they give the whole amount to the funds. The funds then turn these tax-free income into capital gains, which are also tax-free for individual investors.

The disadvantages? For investors who enjoy managing their own investments, their investment in mutual funds will exclude them from direct investment decisions and the ability to buy and sell their investments actively. They also have to acknowledge that this investment vehicle, the fund, does not only belong to them – they belong to all ‘unit-holders’. Their rights are therefore limited to the portion in which they invest.

Another disadvantage is that the future return from mutual funds is not accurately predictable whereas the direct investment in bonds is. This is because the funds invest in various bonds and assets whose prices and yields change frequently.

There are two main types of fixed income mutual funds, open-ended and closed-end. Their features can be summarized as follows:

eature	Closed-end funds	Open-ended funds
Fund size	Fixed. If investors do not invest during the initial period, they need to buy the units from existing unit-holders.	Flexible. Size grows when there is demand for units and shrinks when investors sell.
Life	Usually fixed for 2-10 years	Indefinite
Liquidity	Low; cannot be bought and sold frequently	High; can be easily bought and sold
Where to buy and sell?	Secondary market; i.e. the SET	Asset management company and their agents who are mainly banks and brokers

Nowadays, open-ended funds are more popular because investors can buy or sell the units from and to the asset management companies and bank branches. A number of the funds are available everyday, making them very liquid.

Through fixed income mutual funds, retail investors can participate in the bond market more efficiently without using a large sum of money. The funds can also help reduce their risk exposure of holding only a few securities while enhancing the possibility of higher returns. However, do not forget that the funds are not bank deposits, and all other risks associated with investment in bonds, which I have mentioned in the previous articles, are applicable here.

Investing: Top-down Or Bottom-up

When it comes to investing in good companies, there has been much debate on the top-down and bottom-up approaches. Most fund management companies use the top-down approach and recommend that investors examine the economic and industry outlooks first before deciding on which stocks to purchase.

On the other hand, investment experts like Warren Buffet and Peter Lynch favor the bottom-up approach. They say that macroeconomic forecasts are actually major distractions for investors as the projections might turn out to be wrong. Instead, investors' efforts should be placed more on detecting the quality of earnings and asset value of the company.

Both approaches have their strengths and weaknesses, but they share a common goal, which is identifying good fundamental companies to invest in.

With the top-down approach, investors study the economic trends and then determine the industries and companies that are likely to benefit the most from them. Say, for instance, the reduction in prices of imported paper will contribute to lower operating costs for media companies and increase their earnings. Investors will then search for more efficient and cheaply priced media companies. On the other hand, negative events like high interest and inflation rates or currency depreciation, can affect a country's economy and definitely cause stock prices to tumble.

Top-down investors will first look at the entire forest instead of specific trees and try to identify the main market theme ahead of the market in general. They believe that picking individual companies comes second because if the economic conditions are not right for the industry that a company operates in, it will be difficult for the company to generate profits, regardless of how efficient it is. However, such investors may sometimes miss good companies that are still performing well, even in a depressed sector.

Conversely, bottom-up investors conduct extensive research on individual companies. As long as the company's future prospects look strong, the economic, market or industry cycles are of no concern. In fact, the downturn in the stock market may provide investors with a good margin of safety to buy stocks at depressed levels and ride them up to big gains.

So, bottom-up managers will buy stocks even though the macroeconomic and industry outlooks look uncertain. When the industry may be out of favor and most investors are ignoring the true earnings of companies, bottom-up managers can detect good and well-managed ones selling at prices that are far lower than the intrinsic value.

However, to top-down managers, bottom-up managers may be attempting to catch a 'falling knife' (a stock whose price has fallen tremendously in a short period of time) in a down market. Unless bottom-up managers have plenty of bullets to average down on their purchase prices, they may run out of cash if the stock prices continue to lower. Moreover, they may sometimes fail to see the wood for the trees; they may identify certain companies but miss the overall industry trend.

The top-down and bottom-up approaches are two distinct and fundamentally very different approaches to investing. Investors can combine the top-down and bottom-up approaches by applying top-down analysis on asset allocation decisions while using a bottom-up approach to select the individual securities in the portfolio.

Michael Russell

Weekly Market View (July 28 – August 1, 2008)

Economic
US: The Conference Board consumer confidence index rose for the first time in the last 6 months, as oil prices decreased. However, economic data released later this week showed poor results i.e. GDP grew weaker than expected in 2Q08 at 1.9% and unemployment rate climbed up from 5.5% in June to 5.7% in July as 51,000 jobs were cut.

Europe: Euro zone economic confidence retreated to 89.5, the lowest level since May 2003. Inflation hit a new record high at 4.1% in July, while market expected the ECB would raise its policy rates in September meeting to curb inflation. In Germany, unemployment dropped by 20,000 on the month in July to 3.250 million, the lowest figure in 16 years. However, a 3.7% YoY decreasing in retail sales added nervous to the German and economic gloom.

Japan: Unemployment rose 4.1% in June, the highest level in 2 years, and household spending decreased for the fourth consecutive month by 1.8%. Industrial output dropped a slightly lower than expected, added worry on a weak economy.

China: President Hu Jintao said sustaining economic growth is its economic priority. The central bank also authorized commercial banks to increase their lending by 5%, which supported the president Hu’s word.

Thailand: The BoT revised its 2008 headline inflation up to 7.5 – 8.8% from 4.0 – 5.0% previously estimated, while core inflation was revised up to 2.8 – 3.8% from 1.5 – 2.5% earlier estimated. The central bank also revised GDP08 down from 4.8 – 6.0% previously projected to 4.8 -5.8%. For June economic data released on the last day of July, private consumption index rose 1.2% MoM, while private investment index upped 0.7% MoM. Trade account showed USD926mn surplus, where exports rose 28.5% and imports increased 31.5%. July’s inflation rose 9.2% as oil prices stayed at high level. However, the BoT said that July’s inflation was not too high as it came out as expected, and the number slightly changed from a month earlier. Market expected the central bank would raise its policy rate by 0.25% in 27th August meeting.

Fixed Income Market
This week Government bond rallied approximately 20-30 bps, especially for more than 2-year tenors. Oil retreated to around USD122 from its all-time high at USD147, together with lower commodity prices, reinforcing lower inflation expectation. Lower yields also reflected uncertainty of global economics, US hit by unexpected rose in jobless claims while Australian banks faced more provision on sub-prime related portfolios. All sentiments put cap on policy rates of every central bank, especially emerging market region, which headline inflation weight much more on foods relative to developed countries.

Equity Market
The week started with a move to the downside as Supreme Court accepted Digit lottery case against Finance Minister. BoT’s GDP downgrade as well as upward revision for CPI also added selling pressure. Yet, Thai stocks managed to gain ground toward the end of the week following regional markets as concerns over US slowdown and inflationary threat receded. July’s headline CPI of Thailand, which dialed in at 9.2%, was also lower than consensus forecast. Global oil prices, which continued to decline on worries of demand destruction, also helped relieve inflationary fear.

A Closer Look at Bonds

Bonds are safer than stocks, but they still have risks.

Among the most common forms of investment in Thailand: bank deposits, finance companies’ promissory notes and negotiable certificate of deposits (NCD), we should realize that they have the lowest investment risks and should not expect a high yield.

So what other products can we invest in if we are not satisfied with the current yield of 2-4% a year offered by those instruments? To most people, the reply would be “stocks”. But not everyone is comfortable with the wide fluctuation of stock prices, which can wipe out most of our principal in a few days if we pick the wrong stock(s).

A number of investment products have investment risks ranging bank those of bank deposits and stocks. Some retail investors in Thailand just started to be more familiar with is “fixed income securities”. There are IOUs which a borrower, or an “issuer”, promises to pay a lender, or a “holder”, the principal plus interests after a certain time – usually more than a year. Interests, or “coupons”, are mostly paid in a fixed amount every six months; hence the name “fixed income” securities.

Unlike the normal IOUs like bank loans, these instruments can be and are often traded among professional investors like banks, government agencies, insurance companies and mutual funds. That is, before these instruments reach their maturity dates, they can be bought and sold many times.

The most common fixed income securities in Thailand are bonds and debentures. Bonds are often referred to the instruments issued by the government or government agencies such as the Bank of Thailand, the Financial Institution Development Fund and state enterprises. Debentures are issued by well-known public companies and financial institutions. Almost all other features of bonds and debentures are the same, so in this article, I will use the word “bond” to mean both types of fixed income securities interchangeably.

What to look out for?

Prior to buying a bond, you should acknowledge and understand the investment risks associated with it. There are four major risk categories: default risk, interest rate or price risk, liquidity risk and event risk.

Since a bond is a form of an IOU, your most concern should be the borrower/issuer. Obviously, if the issuer is the government or government agency, you will feel safer to buy it than if the bond’s issuer is a company – you know that they will keep their promise to give you back the money when the bond matures. That is, the default risk is low for government bonds.

By comparison, the default risk for corporate bonds are higher. There have been cases where the companies ran into financial problems and could not repay the money to the bond investors. Some of you, unfortunate investors, may remember these bonds which were issued by various financial institutions and property companies in 1993-1995 and were defaulted. To date, investors have received very little back from such high-interest instruments.

Some defaulted corporate bonds

Issuer	Industry
Finance One CMIC Finance and Securities General Finance One Holding Property Perfect Modern Home Thai Petrochemical Industry	Finance Company Finance Company Finance Company Holding Company Property Development Property Development Chemicals and Plastic

Source: Thai Bond Dealing Centre’s web site

Since there are many companies issuing bonds now, a retail investor may find it difficult to evaluate how much default risk you are taking on for a particular issue. To help investors evaluate risks, the government and the public sector have jointly set up a company to evaluate the financial health of an issuer. The company, TRIS, rates most of the corporate bonds that are sold to the public. An issuer with an “A” rating is deemed to be financially stronger than one with a “B” rating.

A second category of risk, interest rate or price risk, is involved with a fluctuation of market interest rates. As I mentioned earlier, bonds can be traded before the maturity date. So, if you do not hold the bond until maturity, where you will receive the principal and the last interest payment, you will have to worry how much you can get from selling it.

As bond prices are dictated by the market interest rates, there is no guarantee that you will always sell the bonds with a profit. That is, the more volatile the interest rate is, the more volatile the bond prices are. As a general rule, bond prices rise when the interest rate declines, and vice versa.

So, when you need to sell the bond that you bought when the market interest rate was 8% per annum, it is likely that you will lose some money if the future market interest rate is 12% per annum. Please note that the coupon rate – the rate that gives you semi-annual interests – has nothing to do with the bond prices.

You may remember the liquidity risk from the last week’s issue. This is measured by the ability to turn the bond into cash when you need to sell it before its maturity. As you would expect, “high-quality” bonds (i.e. the government/state agency bonds) are more liquid than the lower-quality ones such as corporate bonds. This is because many investors, particularly banks and insurance companies, are required by law to hold government bonds as part of their reserves or investment. So, the “demand” always exceeds the “supply” for these types of bonds. Obviously, the bonds that have the highest liquidity risk are the ones that have defaulted or are “rumored” to become defaulted shortly.

The last risk category, the event risk, has to do with special circumstances that can affect the ability of the bond issuer to services the debt. The risk can strike suddenly. The closest example in Thailand is when the Bank of Thailand shut down finance companies in 1997. Overnight, their bondholders were left with the bonds with no value. Examples in other countries include a major accident for an oil-producing company or a sudden change in government policy relating to concession for a telecommunication company.

Conclusion

You may agree that fixed income securities can be another attractive investment alternative. They, especially the government bonds, can offer higher yield and provide you with more liquidity than banks’ fixed deposits. However, do not forget that this opportunity (to gain higher return) requires that you fully understand the characteristics of the bonds. Before you buy them, you should ask the distributor/seller to explain and compare the four major risk categories with other issues in the market.

Reprinted with modification from 'Money Matters', a weekly column written by Reungvit Nandhabiwat, former managing director of AYF, for the Bangkok Post.

September 6, 2000