August Letter to Clients

August Monthly Letter

August has been an extremely volatile month with the downgrade of the US debt by the S&P, which leaves us begging the question what is now the risk free rate to be used by investment bankers/firms around the world…

Portfolio Activity

For existing clients we went to relatively high levels of cash (~35-45%) at the beginning of August 2011 as we anticipated issues from the US with potential negative news as well as issues locally with valuations again going ahead of their target prices

For new clients we have continued to keep cash at high levels because of the continued volatility in the markets.

We did enter into a few trading positions in PTTCH and BANPU to take advantage of the volatility, but given the potential for an extremely negative outcome in Europe we would be amiss to be fully invested at this point.

Global Events

Libya

Commodity prices pulled back strongly with the change inLibyaand Gadhafi being removed as statesman.

US

Downgrade of the US Debt by the S&P Rating agency, we suppose that they had a point to make, only for the head of the S&P had to resign a few weeks later. It looks like it doesn’t matter which country you live in to experience politicians negatively impacting a country for the benefit of their backers. Finally traders/investors in theUSare still praying for a QE3, it will most likely come in one form or another over the next 12 months.

Eurozone

“The European Union”, bemoans one veteran Eurocrat, “was not designed to deal with a crisis.” The Euro was created without the supporting structure of a treasury, tax-raising powers, and coherent decision-making.

The Eurozone issues continue with news that the Euro zone interbanking lending facility had temporarily frozen requiring the European Central Bank to pump liquidity into the system. This month they will consider legislation to approve expanded powers for the European Financial Stability Facility (EFSF), a temporary fund for helping the indebted euro countries. After that it will vote on a second bail-out ofGreece, worth about E109 billion, and then on a permanent successor to the EFSF.

A solution postured is forEuropeto issue Euro-bonds jointly guaranteeing by euro-zone governments. The debt and deficit figures of the euro zone compare favourably with those of American andBritain, whose bonds are treated as safe.  But this reduces the borrowing costs of the profligate and could increase them for the virtuous and hence reduce the incentive for reform. So Eurobonds inexorably lead back to the question of fiscal, and hence, political, union.

Issues with end of the month rally in the SET:

There are a few reasons other than the above that make us worried about the strength of the rally in the market in the last few trading days of the month1.All of the net buying has come from local institutions. Local institutions generally represents close to 20% of total market trading volume, thus if 80% of the market participants (retail investors accounts for 50% and foreign investors 30%) are selling their shares despite the end of month rally…why should we be buying?

2. General market volume dropped from its average of THB 35 billion by 30-35% to ~THB 20-25 billion

Still several positive points:

But despite the negative look of this letter we still see plenty of reasons to positive with the economy locally and the markets in general:

  1. We expect 3Q11 GDP in the US to be far better than expected, given that 2Q11 had to account the natural disaster in Japan and the knock-on impact it had on global GDP.
  2. Locally with corporate income taxes likely to be reduced from 30% to 23% to 20% over the next few years is absolutely positive for the SET.
  3. Locally we can see already the improvement in consumer confidence since the new government has come in and with the huge push for infrastructure spending and populist policies such as the first-time buyers property tax and car buyers tax rebates would push consumer spending thus boosting the local economy.
  4. Airports of Thailand continues to beat all expectations with the number of visitors coming to Thailand, yes critics may say that Thailand isn’t attracting high-end tourists, but in all honesty the majority of tourists that have always come to Thailand were budget / mid –income travellers.
  5. Thai companies are expected to grow ~20% on earnings in 2012.

So What?

We have no idea how the Eurozone issue will be fixed and would prefer not to posture a solution, but we know that there is an issue which may result in a liquidity crisis, hence our reluctance to fully-invest client funds in the markets today. We can picture either a perfect world where corporate earnings continue to grow strongly, the US Fed happily continues to pump liquidity or one where the Eurozone falls apart. Thus going forward our investment strategy remains similar as the past few months, the cash position will vary as we take advantage of declines in the market to trade with large cap stocks, while holding onto our core investments that have upside with minimal business risk.

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