Anticipating a surge: The sector is expected to pick up after a flood-related slowdown in 2011

Capital markets in Thailand offer investors a growing range of options with an increasing share of the country’s 65m citizens, adding to a more liquid retail investor base. Tax incentives to encourage initial public offerings (IPOs) have led to an equities market of many choices, and in recent years the fixed-income options have increased as well. Along with the continuing development in these asset classes, a derivatives market may be next to emerge on the scene.

However, the country still suffers some of the constraints and challenges typical to raising capital in a middle-income market. The equity offerings are wider than they are deep, there are few institutional investors and the leverage of minority shareholders is low because public floats are small. The government has considered a range of reform options, some of which are closer to fruition than others.

SIZE & SCOPE: Thailand has four bourses: the Stock Exchange of Thailand (SET), the Market for Alternative Investment (mai), the Thailand Futures Exchange (TFEX) and the Agricultural Futures Exchange of Thailand (AFET). Trading of equities and debt takes place on the SET, which also owns the mai, a junior exchange for starter listings. The TFEX, which is owned by the SET, and AFET are derivatives exchanges. The Securities and Exchange Commission (SEC) is the TFEX’s regulator, while the Agricultural Futures Trading Commission (AFTC) is the AFET’s regulator.

A number of Thai financial experts have served at the helm of these institutions as well as the Ministry of Finance in recent years: economist Thirachai Phuvanatnaranubala is a former head of SEC and minister of finance, Vorapol Socatiyanurak is the current SEC head, and Kittiratt Na-Ranong, the present finance minister, is a former SET managing director.

The SET opened its doors to trading in 1975, several years after the closing of its predecessor, the Bangkok Stock Exchange, which never gained a critical mass of traders and stocks. As of March 2012 there were 471 companies listed on the bourse with a combined market capitalisation of BT9.85trn ($314.22bn). The mai had 74 companies and a combined market cap of BT93.07bn ($2.97bn). Average daily trading volume on the two boards was BT29.47bn ($940.09m) in 2011, up 1.4%. Foreign investors accounted for 22.8% of activity. Institutional investors make up roughly 10% of volume (trading volume on the SET does not include bond trading). The largest is the Government Pension Fund, which had assets totalling BT524.64bn ($16.74bn) at the end of 2011.

The current structure of the SET is somewhat unique, combining qualities found in similar organisations – it is a quasi-government agency, but, like bourses operating mutually, some of the more established brokers have invested in a seat on the exchange. However, differing from a traditional mutual structure, brokers do not share the ensuing profit. Instead, it is retained by the SET, which had amassed assets of about BT15bn ($478.5m) as of 2010.

SET50: The SET50 is an index of the 50 largest stocks on the exchange, and is the benchmark used to measure the performance of the overall market. The SET50 closed above 870 points, a 16-year high in early May 2012, helped by pent-up demand in the wake of the 2011 floods and interest from foreign investors perhaps seeing weak opportunities in their home markets in Europe and the US.

The mai began operations in 1999, and as of the end of 2011 had 73 listed companies trading and a market capitalisation of BT77.31bn ($2.47bn). Also under the SET’s ownership umbrella is the TFEX and the Bond Electronic Exchange, an electronic platform for debt trading that was launched in 2003.

BOND MARKET: Thailand’s bond market has grown in leaps and bounds since the 1997-98 Asian financial crisis, in part due to the government’s support for it as an alternative to bank financing. The financial sector is active when it comes to introducing new products, and in 2011 brought inflation-linked bonds and a 50-year issue to market, making Thailand just the fourth country to sell debt with such a long maturation date. A goal for the near term is to further develop the corporate bond market, which is dominated by state-owned enterprises such as PTT, the country’s largest energy provider. Vorapol told OBG that emphasis will be on getting medium-sized companies to consider securities offerings as an alternative to bank loans (see analysis).

EQUITIES MARKET: Less than 100 stocks on the market get regular consideration from institutional investors – about 65 to 75. In many cases a company’s public float is less than 50% of its value, allowing the original owners to retain control. Buying Thai stocks is often a short-term proposition, as investors tend to speculate unless they have access to those controlling it. However, the opinions of minority shareholders are valued in settings such as annual general meetings, especially when exercising veto rights.

Liquidity remains an issue, but noticeably less so, and the numbers are increasingly encouraging. According to data provided by the SET, in 2009 the average daily value of shares traded was half that of Singapore’s. By the second half of 2010, however, that figure had reached 95%, and in some months Thai stocks were actually more liquid than those in Singapore. The overall figure slipped to 83% in 2011, which the SET attributes to flood impact.

A SET-compiled chart from the World Federation of Exchanges shows a clear divergence in the region over the last several years. In 2008, according to the data, the daily value of shares traded was at some $500m on the SET as well as on the main exchanges in Indonesia and Malaysia. However, in the first quarter of 2010 Thai activity surged to almost $800m, and has dipped below that level only a few times since. In Indonesia and Malaysia volume has not made that same jump. One of several explanations for this liquidity jump is that commissions were deregulated, said Banyong Pongpanich, the chairman of Phatra Capital. Others include programme trading and more derivatives options. The challenge from here, according to Banyong, is to capture that increased interest for the long term. “Authorities have to plan for the longer-term development of the capital markets by encouraging new supply.”

INCENTIVES: The country is still seeking the right mix of incentives to encourage IPOs that will emerge as liquid stocks. Tax breaks have been used in the past to coax private interests into a public listing; however, that has created a situation in which firms list an insignificant stake solely for the tax break.

Furthermore, given the relative maturity of Thailand’s capital markets, there is not a long list of potential privatisations or large private sector corporations that remain unlisted. Many companies were holding off listing in 2011 due to volatility and the change in government, and also because of the floods. For that reason, pent-up demand is expected to yield more than BT18.46bn ($588.87m) in IPO activity in 2012.

“Though there has been some delay in IPOs in 2011 due to higher market volatility, we expect to see the IPOs come through once the situation has normalised somewhat,” said Montree Sornpaisarn, the CEO of Kim Eng, Thailand’s largest broker by market share. An example is Thai Air Asia, which listed on the SET in May 2012. CIMB Group, the Malaysian regional banking concern, has done the same, and could become the first foreign dual listing. The SEC is also trying to encourage IPOs from firms beyond Bangkok. The most optimistic forecasts are for 20 to 30 listings in 2012.

FUNDS: Thailand has a relatively large market for funds. Fixed-income funds have historically been large buyers of not just Thai bonds but also Korean ones – Thai kimchi funds have been the third-largest group of foreign holders of Korean debt, but higher yields at home have led many fund managers to switch to domestic assets. Bond funds are popular with the bulk of Thai retail investors, who are generally considered conservative in their approach to investing.

Several exchange-traded funds mimic the performance of the benchmark indexes, such as the TDEX linked to the SET and others tracking energy stock performance, Chinese assets and gold, a newly tradable derivative in Thailand. More are expected, as this is another area in which authorities have found a gap between the scope of offerings here and in Singapore.

Property funds should receive more attention in 2012, depending on the pace of reform. Existing property funds are a vehicle for mature assets – populated with assets already built and offering a share of the revenue as income for investors. The Thai unit of UK retailer Tesco sold units in such a fund in a March 2012 IPO, raising BT18.4bn ($586.96m). The money will be used to buy malls from Tesco, which will be leased back to the retailer, creating a revenue stream.

Another new fund introduced in February 2012 was the Infrastructure Fund, which will trade on the SET. Fund receipts will be used to finance infrastructure projects, and tax exemptions on the proceeds will be used to attract investors, according to the SEC. In June 2012 the regulator introduced to the market real estate investment trusts (REITs), which will be a more aggressive vehicle that will allow for investment funds to be used for developing new properties, and therefore offering a chance at capital appreciation.

However, according to Prasit Srisuwan, the CEO and president of Country Group Securities, “It will take some time for retail investors, who form the majority of Thailand’s roughly 600,000 broker accounts, to grasp the concept of infrastructure funds – in the short term we expect the vast majority of investors in these instruments to be institutional.”

DERIVATIVES: Trading on TFEX’s derivatives platform began in 2006, with the first product a SET50-based futures contract. The TFEX now offers other futures contracts based on the SET50, individual stocks, gold, interest rates, silver and oil, as well as a SET50 option. Volume in 2011 reached an average daily value of 41,145 contracts, up 120% from 2010, according to a TFEX press release detailing 2011 performance.

TFEX officials credited the gold contract as well as night trading hours. As of the end of 2011 there were 62,883 trading accounts registered, up from 41,880 at the close of 2010. As of spring 2010 the number had been at around 32,000, according to Bloomberg, implying a consistent trend of increasing participation. Domestic retail investors accounted for 60% of the total, with foreign investors comprising 6.4% and domestic institutional investors 36.6% (see analysis).

AGRICULTURAL FUTURES: The Agricultural Futures Index of Thailand was established in 2004, and offers trading in contracts tied to rubber, rice and tapioca. Debts are mounting as AFET seeks to gain critical mass and pay off costs. Investors have not only stayed away because of a lack of liquidity and other reasons that are common to small trading platforms, but also on account of government intervention in prices – the government sets the floor on prices for rice and rubber, and other politically motivated price distortions are possible as well.

In 2012, for example, a rice subsidy scheme, widely seen as a populist tactic by Prime Minister Yingluck Shinawatra’s government, boosted the price the state pays to farmers for rice from BT10,000 ($319) per tonne to BT15,000 ($479). Like TFEX, however, AFET’s performance in 2011 featured more trading activity – revenue from trading more than doubled in 2011, rising to BT7.5m ($239,250) from BT3.89m ($124,091) in 2010, according to a year-end AFEX financial statement. But expenses dwarfed revenue on the year: BT76.37m ($2.44m), in comparison with the total revenue of BT19.96bn ($636.72m).

GROWTH PLANS: One plan currently being considered to enhance the agricultural futures market is the merging of the TFEX and AFET, in hopes that combining the two could improve their fortunes through efficiencies, economies of scale and modernisations.

Another potential catalyst for growth in the country’s derivatives market is currency futures, which are in demand by export-driven firms looking to manage risk from currency fluctuation. A dollar futures contract was introduced in June 2012, allowing residents to trade; however, this had not been approved for non-residents in order to ensure against any negative impact on capital flow and currency speculation.

DEMUTUALISATION: Early 2012 saw plans for demutualisation of the SET, which had been on the cards since 2010, scrapped. The Capital Market Supervisory Board determined in April 2012 that the plans for privatising the bourse, which came from the Capital Market Development Master Plan, co-developed with the Asian Development Bank, were unnecessary. At the core of the plans to demutualise the SET was the shedding of its current organisational structure, incorporating it and stripping it of its monopoly status as an equities platform, with a view to creating better services by allowing competition. One of the motivations behind the plan was to rid the exchange of some non-core assets and public functions, allowing for more focus to be put on market development and operations. The plan would have created a capital market development fund to handle efforts like investor education. It would also have served as a major owner of the SET, with a stake of at least 25%.

The impetus for the proposed law was the general desire to increase reliance on capital markets as a place for firms to get financing and a way for individuals to invest. One reason for this is the culture of banking and finance in Thailand. Memories of the Asian financial crisis remain fresh, and capital markets are seen as an appropriate vehicle for lessening the country’s reliance on banks for financing. Measures are likely to continue to push corporate borrowers and retail savers into considering other options, taking some of the load off the banks. One example is the reduction of the cap on deposit insurance from BT50m ($1.6m) to BT1m ($31,900), which could narrow the perceived gap in risk between holding securities and holding cash.

OPPOSITION: Opposition to the plan came from the brokers, many of whom have paid for their seats and consider them a major asset to their firms. Although the plan may be on ice for now, brokerage reform is continuing and is thought to be a possible catalyst for growth. Ending the regulated commissions on trading has created an environment in which the cost of trading was high and choices for securities were low. Commissions had been fixed at 0.25% of the value of a trade for retail investors, and at 0.15% for online trades, and those thresholds were dropped in favour of market-set rates as of 2012. The reforms to the commission structure did not have as big an impact as some were expecting, according to Thanapisal Koohapremkit, the CEO of Globlex Securities. “The liberalisation of commission structures has led to a small drop in brokerage revenues for the industry rather than the huge dive people were expecting, mainly because the industry has maintained relatively good price discipline through the association.”

In addition, deregulation of rates for those trading above BT20m ($638,000) a day, as well as for local and foreign institutional investors, came in 2010. Changing the regulations for brokerage might hurt the brokers, some argue, but others say it will lead to a more competitive and consolidated market, which over time will attract new investors (see analysis).

OUTLOOK: Various reforms are under way as part of ongoing efforts to boost market activity and relieving some of the pressure on banks to handle corporations’ financing needs. By reducing the cap on deposit insurance on bank accounts, it is hoped money above and beyond the new insurable level will be redirected towards the markets, resulting in more investors and hopefully more demand for IPOs.

Thailand continues in its role as a regional leader in bond issuance, as 2011 saw new products such as inflation-linked bonds and a 50-year government bond brought to the market, as well as an overall deepening and widening of the choices available, and a further articulation of the yield curve to help price corporate issues. The expectation as of early 2012 was for a flood-related surge in all types of activity, based on the theory that pent-up demand from the final quarter of 2011, when the floods pushed market activity lower down on corporate agendas. The financing of rebuilding and construction works is also expected to give a boost to stock prices, the flow of IPOs and bond sales, as well as other common activities.