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A Dim Economic Picture
But Thai stocks could be long-term bets

Sukanda Lewis has seen it all. The fund manager with Krung Thai Asset Management in Bangkok watched as the Stock Exchange of Thailand (SET) index hit a record high of 1,700 points in 1994 — and then skid to an all-time low of 214 points in 1998 as foreign investors abandoned the country in the wake of the baht's collapse. The SET was up again in 1999 on the back of a stabilized currency, low inflation and renewed GDP growth. But the economic picture has lately turned dimmer. On Oct. 10, the index closed at 261 points. Lewis, who runs three funds including one targeting parents saving for their children's education, spoke with Asiaweek's Julian Gearing.

Why is the SET under pressure?

There are several reasons. The banking sector, which comprises more than 20% of the market, is facing serious problems, and these are not being solved as [fast as] had been hoped. Banks have been transferring bad loans to asset management corporations, but that doesn't represent real change. We are also seeing a recurrence of non-performing loans — about 10% of restructured debts. The Thai banking sector is still weak and cannot really perform its function as an intermediary. The problem is not even lack of liquidity since banks have a lot of money. There simply are not enough good projects to lend to.

Our stock market is also very small. We have 392 listed companies, of which I consider 50 at most as good [investments], although I really like only around 10. You have to understand that the Thai market is really driven by foreigners. First the foreigners come in, then the Thai locals will come in too. Institutional investors like us don't really [play] much of a role. We are small compared with local [retail] players and the foreigners. So when the foreigners don't come to Thailand, the market just dries up. The near-term prospects for the Thai stock market are not too rosy. The longer term is looking better.

Is the coming general election a factor?
People will wait and see until there is a new government and a new minister of finance and other key ministers. There will be a vacuum for a few months. But if people believe [the new government] will be up to the job, the market can get going. Some policies announced so far, like Thai Rak Thai Party's debt moratorium for farmers, will cause more problems. People who want to invest will wait until they see signs of who will be the guys making policies.

You mentioned 10 companies that you really like.

I don't want to name them, but I can tell you the key sectors that I think investors should look at for the long term. These are telecommunications, energy, consumer and retail, and electronics. What is driving Thailand at the moment is exports, which should grow 20% this year. Electronics firms are doing well because the demand for their products is still strong in the world export market. With a weaker baht, which has slipped from 39 to the dollar to 42, this sector will benefit. But I see world economic growth slowing next year. Thai exports will still do well, but not as well as this year. Therefore we are looking at a more defensive position. That is why I am looking at energy and consumer and retail, including entertainment. There is a lot of advertising coming in.

Telecommunications accounts for 18% of the stock market, compared with 12% in 1998. It is a high-growth sector, with subscriber growth remaining strong. Everyone, it seems, wants a mobile phone. If we look at valuations, the [prospective] P/E ratio [of the telecom sector] for 2000 is 36.58. For 2001 it is 24.93. Net profit growth for 2000 is projected at 76%; for 2001 it is 147%. And let's not forget the backbone of Thailand, the agricultural sector. Thailand's competitive advantage lies in its agricultural products, because we can produce these quite cheaply.

There are complaints about the governance practices of Thai companies.

Some studies by the World Bank show that Thai companies mostly do not do that well [in this area]. But they have become more careful in the last few years, forming audit committees and imposing stricter standards of compliance. They are trying. They know that in order for Thai companies to look attractive [to investors], you need good governance.

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