Published on January 31, 2005

At the end of last month, this column made its 2005 predictions for the Stock Exchange of Thailand.

I suggested the year would start well (given the elections and cheap valuation relative to the region this was, admittedly, a high-probability prediction) and then go quiet for a relatively long period after the election. The index would trade in a range, before getting into another positive stride as we entered the last quarter.

January has given me no reason to amend this forecast.

I still feel we are in a good election-period rally that should take us reasonably beyond the current 700 level, mainly driven by the elected party assuming a clear working majority in Parliament. Markets dislike uncertainty. A clear result will ensure clear policy. With fiscal expansion on the cards and monetary policy being reasonably accommodative, the second leg of the January rally should then roll on for a bit. But beyond that, we will probably settle in for a period of moderate index performance.

The economy will chug along, with possibly higher-than-expected gross-domestic-product numbers. Interest rates will rise gradually, export growth will be good – but not as strong as in 2003 and 2004 – and the baht could see another leg-up, with or without any upward adjustment of the Chinese yuan.

Headline inflation should remain subdued and costs are likely to rise for companies, impacting margins. Volumes may surprise on the upside, but not substantially so.

All said and done, 2005 will be a lower-volatility year with better-than-average performance coming from picking select stocks rather than merely buying big-cap stocks or index-benchmarked products. This is actually likely to be a year where mid-cap and relatively smaller stocks do better.

While this may sound counterintuitive in a sense, as larger firms can obviously absorb cost increases better, the mid- and small-cap stocks are where the growth is and 2005 is a year in which growth should outperform expectations.

When I visit companies, they mention that they constantly get questioned about their dividend policy. Mind you, dividends are good in an environment where deposits yield between 1 and 2 per cent. But with interest rates rising (however slowly) and average earnings growth for the market being modest, it is worth having companies in your portfolio that can deliver better-than-average earnings growth alongside any dividend-yield stocks one may own.

Growth is at a premium this year. If you think the overall market’s earnings are going to grow at 10 per cent, look for companies with 50-100 per cent higher numbers – especially if the line of business has good earnings visibility – and pay up for that growth. Many companies are making a lot more money on their employed capital than we can get from a bond yield, so, if they have expansion plans and also use leverage well, then consider buying them for their earnings growth prospects alone.

On the bond side, while yields have risen substantially on the shorter end of the yield curve, I would remain cautious. The Bank of Thailand has supportive policies but rising rates, however gradual, will still have an impact on yields. Looking out through the first half, three- and five-year bonds remain vulnerable. There will be short rallies as things overshoot (possibly the five-year bond is even a trade at a 4.1-per-cent yield), but one should probably err on the side of caution.

Outside of Thailand, I remain short-term bearish on emerging markets as an asset class – and the Nasdaq, for that matter. Earnings expectations that have been built up need to be further unwound before we can have a meaningful rise here. It’s a slower growth year for the world economy and pedestrian growth in earnings and GDP does not translate into a roaring bull market.

A friend sent me an interesting report the other day which showed that emerging markets have outperformed developed markets for four of the last five years. Could the boot be on the other foot this time? It just might be.

Whatever happens elsewhere, the SET should be able to hold its own against regional and other global markets in terms of 2005 returns – and this time possibly accompanied by less volatility than usual.

This column appears by invitation.

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