Saturday, June 10, 2006

Time for bargain hunting

From Kelive thailand

The Thai stock market has now fallen 14% from its 2006 peak of 785.38 on May 9 to close yesterday at a fresh six-month low. We believe the steep and rapid sell-off offers great bargain-hunting opportunities for both value investors and short-term traders.

Clearly, there is still a lot of negative news around. Stock markets around the world have fallen sharply over the last month due to concerns that the global economy is facing a slowdown in economic growth at a time of rising interest rates. Nonetheless, we believe investors in the Thai market have greatly over-reacted to these concerns, driving share prices to levels not seen since the political turbulence last December.

While a correction in global equity markets was not a surprise after a strong rally in the first four months of the year, it now appears that investors are throwing in the towel and getting out no matter what the price. The MSCI's broadest index of shares outside Japan is down more than 6% this week as of yesterday and is now down 16% since its all-time high on May 8. Such capitulation is usually a sign that markets are close to bottoming out even though there are a lack of positive catalysts.

The slide in global equity markets over the past month was initially triggered by concerns that the Federal Reserve will have to raise the US federal funds rates by another 25 bps at its next meeting on June 28-29. US interest rate futures have priced in around an 80% chance of the Fed raising rates to 5.25% from 5%. Yesterday the European Central Bank raised interest rates by 25 bps to 2.75% and indicated that it would gradually raise rates again to head off inflation.

We don't believe that the Bank of Thailand necessarily needs to follow suit and further raise rates given that commercial banks, already faced with sufficient liquidity and slowing loan demand won't likely follow the BOT's lead anyway. The resulting currency weakness may lead to short-term selling of Thai shares, but the net result - a weakening currency would be good for the overall economy.

Our chief point is that Thai shares are relatively cheap and long-term corporate prospects are still quite positive. We feel quite comfortable recommending investors to buy some of the companies heavily sold down by foreign investors over the last month

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