Dec 19, 2006|
Thailand gets it right, market down 15%
The central bank of Thailand's Governor, Tarisa Watanagase, has taken speculators head-on. Not local ones, but the "green-back" global kind who chase short-term returns and whose actions are defended as "price discovery".
On December 18, Thailand announced that any international investor who withdrew from the Thai markets in less than one year would end up paying an effective 9.9% penalty tax. Predictably, the Thai stock market is down 15% and had to be shut for 30 minutes of intra-day trading today.
And why did Watanagase take such a step? The Thai currency has appreciated by +16% (but it is falling as we write) in CY 2006 as speculators around the world have bet that all Asian currencies will gain against the USD. This has resulted in two things:
- the first signs of an asset bubble where any Thai asset is being lapped up by foreign punters who are ultimately looking for the gain in currency, not the value if the underlying asset per se, and
- a potential slow down in exports and real growth in the economy as a strong Thai currency reduces the export potential and leads to higher, unsustainable consumption.
Switch to India. Like Thailand, India needs capital to develop. Lots of it. But everyone in this country seems scared to distinguish long-term capital from short-term capital. Any FII buying is seen as a vindication of economic success when, in all likelihood, much of this inflow is the effect of cheap global money. The cost of speculation is close to zero for most global hedge funds. That is why whenever there is any unexpected increase in interest rates, the Indian markets tend to fall like ninepins.
Recall what happened in May 2006 when US interest rates headed up, global emerging markets went into a sharp decline. And then 2 weeks ago when our own Reserve Bank of India (RBI) increased interest rates, the BSE-30 Index was down 7%.
But Thailand has gone a step beyond. They have clearly stated: we want long-term money, punters stay out.
And the 15% decline in the market is the "price" they are willing to pay. While the markets may be in the red and analysts will give all their doomsday scenarios like "foreign investment is at risk" and "capital will stay away from Thailand" for the next week, smile to yourself and know that Thailand will be more real and less speculative. The brokers are basically complaining that they have one less country to make commissions from by moving in planeloads of short term pools of capital. Long-term capital is still allowed but, because it is long term, it pays brokerage commissions only once! Not good for bonuses and fat salary cheques!
And another irony: on July 2, 1997 it was the Thai Baht devaluation that led to the start of the Asian crises and the ultimate insolvency of Russia and Korea in October 1998. But then the world wanted Thailand to devalue, today Thailand has told the speculators: we will do what is in our best interest, if you wish to punt, please take your money elsewhere.
If only India was as brave to take some steps against P-Notes and other forms of short-term capital. But no one wants to be blamed for "killing" the stock market.
Meanwhile, continue to invest by understanding the businesses of the companies you invest in, the quality of the management, and with a strict regard to valuation. Subscribe to our research and be an informed investor. Leave speculation to speculators.
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