A slowing of the US economy next year, due to the credit crunch, likely means lower oil prices and commodity prices.  The key now is to own growth companies which are not linked to US consumption or broad Thai exports....

Here I identify some broad risks and make some predictions into the new year. I then draw the conclusions as to why I stand on all legs to my current investor thesis.

At the start of the New Year 2008, I today try to identify what may be the major macro investor themes into year 2008 which will affect us all. 

At the time of this writing I feel we will have a better first quarter of half with things becoming more tricky during the second half of the year, as the US economy keeps slowing and Thai politics, keeps dragging.  Time will tell.

Late in year 2007 I identified 4-5 “horses” stock picks which I think will fare well (earnings wise as the stock price I can’t predict) pretty much, within reason, regardless of what the political or economic scenario here or around the world turns out to be.  They have clearly been noted recently as my core positions going into what will likely be another turbulent year for us investors.  Having this firmly in place, and overall already up a percentage points, I below share my concerns and ramblings into the new year.

           1) Global growth will likely decelerate as the US credit crunch uncoupling plays out in year 2008.   Obviously at this point nobody knows by how much, but I am not in the camp which minimizes this. 

The huge expansion in credit of years past is now not only coming to an end, but likely to reverse.  This is because major financial institutions have written off billions of $ in first tier capital. Their multiplier effect so is in reverse and the net effect will be low or even virtually no economic growth coming from the West for a couple of years.  In some ways its like the Asian Financial crisis in reverse, where this time its originating from US and spreading to the EU. 

We all know it all started from the US where besides the US housing boom crash, Americans are now as well falling behind on their credit card payments, some count this happening at an alarming rate. Sending delinquencies and defaults surging by double-digit percentages recently, and so prompting warnings that worse is to come.  The broad drop in housing prices along with the overleveraged situation there (same as margin calls on stocks) is precipitating this fall-out.

A US recession is now a possibility, into the presidential election year or not.

What it all means is that broad global economic growth is probably/likely to be cut in half over the next couple of years or more, as compared to what it would have been without this US induced mess.  I call it a scandal as it was so obvious to many of us years before and could have been prevented by the previous Fed Chairman & Co, in my view. Where were the wise men?

       2)  So what does it mean?   It likely signifies key changes for all of us global investors. I here predict some of them:

A)  A drop off in US economic growth means a cooling in energy demand -and so the end of sky high oil prices. I predict year 2008 will see perhaps a dramatic drop in global oil prices.   

B)  A cooling of the Chinese economy whose bubble has been building on the US housing bubble/consumption overindulgence, result is a (possible dramatic) correction in the Chinese high flying stock market.  70% of stocks in China are owned by Chinese individuals, as a group they are more frenzy and so likely to pull the sell trigger faster then more rational long term investors. 

C)  A kick-in-the butt to the commodity bull junkies’ whom have been predicting a long broad up- cycle in most all commodity prices.  I have for over a year already stated that I do not buy this view and clearly expressed this opinion to you already in Oct/Nov of 2006.  The Gold price in US$ has done OK last year, but not as well our average Thai stock picks, not even as well as the SET index which showed a 30% plus returns, in US Dollar value.

D) While the price of food and certain other food commodities will likely remain in an uptrend, the broad-up cycle in commodities’, likely is not.  A drop off in global economic activity is very likely bearish for price of broad commodities, especially non-precious metals.  I note that the price of Silver has dropped in non-US$ terms in year 2007. Silver bulls, as you still there?

E)  Gold has another tune, as here central banks and all other holders of large financial assets will increasingly want/must divest out of Dollar denominated holdings.  What are the legitimate "big cap". alternatives?  Gold surely is one of them. So year 2008 should be the year Gold keeps moving higher, even while other non-food and other metal commodities don’t.  But I don't think it will beat our small cap Thai stocks.

So the big question for us is:  can Gold perform better then our value Thai stocks?  I think Gold is riskier, as it pays no dividends and is priced in US$.  Gold in fact has a negative yield, as it costs to hold and store the yellow metal.  Gold is a non-creative form of assets, all it requires is that you subscribe to the doom global scenario. No need to analyze/visit companies of any kind, just buy this heavy stuff and hope for the, no not the best, but the worst.  This is not my nature nor do I see this so. These "guru's" forever are gloomy get invited on TV talk shows -as the news folks mostly want to broadcast negatively bent flamboyant & inflamatory views.  When they are wrong they later say, they glad they were.

Thailand’s stock market is valued currently at a 26% discount as compared to this region. This prices in already many problems, like political gridlock and changes.  Here are some of my questions:  What happens if the 30% capital reserve currency rule gets lifted?  What happens if whatever new government comes in promulgates pro growth policies? What happens if other recently anti-foreigner proposes rules (like land ownership and the foreign nominee issue) abates?  What happens if the new government starts spending some of their huge accumulate dollar reserves?  As just about all infrastructure spending has been stopped in the recent 2 years due to the political stalemate.  These are just some positive surprises I raise, as everyone of these would be viewed as a positive by the SET.

All positive surprises for the SET discount to narrow this year, as I predict.  As noted recently, there are already signs of Thai economic activity picking up…and a drop in global oil prices would be hugely positive for Thailand. 

I know we can also ask some contentious/concerning questions, like the health of the King, Thaskin’s comeback (and yet on this latter who knows how bad that would really be?), or a significant and prolonged drop off in US economic activity. Or a huge Chinese stock market correction, perhaps just post the Olympics?

Back to the SET’’s large discount, as with these the tough/concerning questions are already in the limelight.

It just remains an undeniable fact that most smaller Thai cap growth shares remain at a discount to the discounted SET average p/e.  Despite the fact that overall they have been the performance leaders for years, and despite the fact that their earnings grow faster overall then the SET average large cap company.

For sure many have less daily trading volume, but for sure most have higher growth rates and lower p/e ratio. It is this out of balance reality which continues to make me confident that for now at least I am firmly sticking with my chosen horses and perhaps a few select large cap.s/ Depending on your appetitite. And yes, I think in the nearer term the SET index can catch up, for a while anyway. 

If the US economy drops off and so then creates a correction in the Chinese stock market, it will affect sentiment on the SET of course, but I feel barely change the profitability on my chosen "horses".

Here again is a short review on my strategy regarding my chosen horses. As stated before I name TRC on the top of the list, deservingly so.

TRC, pipelines, bio diesel & infrastructure related and specialized construction, earnings likely to double this year to 240 mill Baht, or near 1 Baht per share. A huge real estate premium should be earned in the first Q.  And what does PTT committed pipelines, bio diesel, petrochemical cycle etc.. all have to do with US consumption drop off?  I still much like TRC despite its near doubling since pounding the table at mid year.

SAT, trading at a huge market multiple discount, just like TRC.  Toyota just uped its sales forecast to near 10 mill. cars worldwide, next year and will surpast GM in year 2008. Still huge demand for pick up trucks in the Middle East, which is loaded with Petro-Dollars.  New energy efficient cars coming on stream the next few years, Thailand is the new Asian car parts center, by far.  And the USA is not a big market at all for SAT.

SNC, while trading close to the SET market multiple for year 2008. Here is now a mid cap stock which commands a leaderships position in a globally important industry.  A beneficiary of global warming, well managed and asset rich with very few customers/exposure from North America. But large contracts from the middle East real estate boom, so some exposure should oil prices dropp off precipitously.  And like the other picks a solid balance sheet.

DEMCO & SVI, two opposites.  DEMCO a domestic play on electrical gridlock & substations growth -and now more steam pipelines, which has nothing to do with overseas demand/exports US dollar etc.  and SVI basic electronic parts exports to mostly Scandinavian countries. SVI’ earnings are on a strong upward momentum -and as with DEMCO the P/E is near half the SET average.  With Demco we are awaiting the awarding of new contracts, where we will know shortly on progress of this.  With SVI we have a potential share -overhang due to a fund which is their large shareholder, as well noted.   Demco and SVI hence have some uncertainty but the low p/e already prices this in.

These then remain my core value investment picks going into a global cooling year 2008, where yet another financial scandal out of the US*, should prove that Thai small cap investing can withstand the turbulent winds.  There are of course other also interesting selections as I stated in my Pre election broader model portfolio and as I hope to identify more as time goes on.  

It is of course up to each member to make their own decisions and selections.

Best Regards and Happy, Healthy and Prosperous New Year 2008!

Paul A. Renaud.

www.thaistocks.com [2]

* What is happening now in the US is not that unusual, the US has been in such a dire situation a few times before. It seems to happen every ten years.

Ten years ago in 1998, the US and global financial markets came very or even extremely close to a meltdown when back then the huge Long Term Capital Credit hedge fund had to be bailed out for billions of $, and this just as the US FED was preaching the Asian's not to bail out their failed financial intermediaries.

Or do you remember 10 years before that, the late 1980's, as having been an equal or even a worse mess? 

 "Commercial banks also were in serious trouble...the late 1980's ws their worst period since the great depression: hundreds of small and medium size banks failed, and giants like Citibank and Chase Manhattan were in distress"   As written by Alan Greenspan in his latest book "The Age of Turbulence".