September Monthly Letter

Market Update

September continued the volatility seen in August with all assets classes ex US Treasuries globally falling ~10%. The SET dropped just over 14% during September. As discussed in last month’s letter to clients we opined that we were extremely worried about a potential liquidity crisis given the Eurozone’s exacerbated debt issues and the natural slow decision making process of policy makers in the Eurozone. This scenario has unfortunately panned out.

European authorities and local governments have since passed a plan to bolster the European Financial Stability Facility (EFSF) – the Eurozone’s €440bn bail-out scheme. The second leg of the plan is to increase the EFSF to €2 trn, as per economists estimates, which would meet Italy’s and Spain’s financing needs should the two countries be shut of out the markets. For now the exact mechanism to achieve this has yet to be decided.

 

Portfolio Activity

Due to our high cash positions we were able to take advantage of the drop in stock prices in Thailand.  And decreased our cash holdings at the end of September and beginning of October to re-enter into specific large cap names such as IVL, PTTCH and SCB. We find the valuations to be extremely attractive at levels when the SET is below 900.

Local Issues

On 28 Sept, the finance minister told the press that the government was studying a major tax reform possibly involving a capital gains tax. The last time the government or Bank of Thailand imposed a tax on markets was in December 2006 when the Bank of Thailand temporarily imposed a 30% unremunerated reserve requirement on foreign investors, that day the market plunged 18% in intraday trading. We highly doubt that this capital gains tax would be implemented for the following reasons: 1. The government would be worried about the market reaction and Thailand’s ability to attract foreign investment; 2. Although capital gains taxes exist in the developed world they hardly exist in Asia; 3. We doubt any politician would back this as it may upset voters.

The heavy flooding in Thailand we fear may dampen economic growth in the short-term. While this is not affecting Bangkok today, with the majority of Thailand’s working population (~70%) in the Agricultural sector their loss of income will naturally affect their purchasing power.

So what?

We do not know exactly what the future holds but have mapped out possible scenarios, assigned probabilities, match our investment strategy with this and allow for a large margin of error. Going forward we will continue to monitor the Eurozone decision-making process regarding their bailout program for Greece as well as economic data. We still see two general scenarios, a perfect world where corporate earnings continue to grow strongly, ample liquidity provided by both the Fed and the ECB or one where the Eurozone falls apart and we have a global recession. Thus going forward our investment strategy remains the similar as the past few months, we will maintain our core investment holdings in companies that have significant upside with minimal business risk and manage the cash position as per market conditions.

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