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Crystal Ball: The Year Ahead in Capital Markets Paul Gambles 14th January 2015 Disclaimer This commentary has been prepared using information based on the research capabilities of MBMG Group and represents the current opinion of MBMG Group. The opinions expressed are subject to change without notice. Where information has been sourced from parties outside MBMG Group, these are generally believed to be reliable but reliability and accuracy is not guaranteed. This commentary is for informational purposes only and does not in any way constitute investment advice and should not be construed as an offer to sell, a solicitation to buy, or an endorsement or recommendation of any company or security in any jurisdiction. Nothing in this document constitutes a formal legal opinion or constitutes investment advice. Each reader should consider whether this research is entirely or partially suitable for their particular circumstances and, if appropriate, seek additional, specific, professional advice. Neither MBMG Group nor its officers can accept any liability for the consequences of any action taken or not taken as a result of reading this commentary. MBMG Group is an independent researcher of information and does not provide investment advice or asset or financial management in Thailand. MBMG Group is affiliated with MBMG Asset Management Limited, a Mauritian institution that is authorized and licensed to provide investment management services in Mauritius. All investments contain risk and may lose value and past performance is not a guarantee or reliable indicator of future results. 2015 Outlook What will the capital markets do in 2015? They will… … FLUCTUATE! J Pierpont Morgan 2015 Outlook Capital market trends depend on countless factors, including: • Economic performance (local, regional & global) • Public, market & media perception of local & global issues • Policy & politics (central banks’ policies & governments’ policies) • Investors’ capacity and propensity (often overlooked) 2015 Outlook: Global Debt deflation: The last global debt deflation was The Great Depression High levels of PRIVATE debt constrain spending This is being masked by artificially stimulated unsustainable asset bubbles One country has already experienced 25 years of this… 2015 Outlook: Global Japan: Japanese Change in Private & Government Debt Japanese Gross Private & Government Debt Crisis 275 250 GDP Percent change 200 8 175 6 4 150 -6 50 Private Government 25 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 -4 1990 75 1988 -2 1986 100 1984 0 1982 2 125 1980 Percent of GDP 225 Annual change in debt as percent of GDP 300 30 Crisis Private Government 25 20 15 10 5 0 0 5 10 15 20 1980 1984 1988 1992 1996 2000 2004 2016 www.debtdeflation.com/blogs www.debtdeflation.com/blogs 2008 2012 2016 2015 Outlook: Global The United States is turning Japanese Japanese Private debt change & unemployment 20 5 15 4.5 10 4 5 3.5 03 0 5 2.5 10 15 Debt Change Unemployment GreatRecession 11 10 12 9 9 8 6 7 3 6 0 05 3 4 2 Debt Change Unemployment 15 1985 1990 1995 2000 2005 www.debtdeflation.com/blogs 2010 1.5 1 2015 6 3 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 www.debtdeflation.com/blogs Percent of workforce 5.5 Percent of GDP per year 25 20 1980 18 6 Crisis Percent of workforce Percent of GDP per year 30 US Private debt change & unemployment 2015 Outlook To avoid the Japanese disease, Central Banks needed to be more creative in their stimulus solutions… … but most seem reluctant to let go of QE and austerity = which only delays the inevitable re-set = but until then Central Banks call the shots 2015 Outlook For Thai capital markets… Still 3 main challenges • Political stability • International trade • Private debt levels Thailand Number of Foreign Tourists (in thousands) 8,000 7,000 6,000 Trade… 5,000 4,000 3,000 Weakening global demand 2,000 1,000 0 Thailand Exports Y-o-Y (% change) 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 p p -10.0 -15.0 Figures: Bank of Thailand Thailand - ASEAN But trade with LVMC countries still growing % of Total Thai Exports to LVMC 4 LVMC Imports (% Total) 3.5 3 2.5 2 1.5 1 0.5 0 Lao PDR Myanmar Viet Nam Source: Bank of Thailand Opportunities in physical and digital infrastructure Thailand High level of private debt… Sources: BOT Paper “Rising Household Debt: Implications for Economic Stability” (October 2014) & CEIC Thailand …especially in lower income bracket Sources: BOT Paper “Rising Household Debt: Implications for Economic Stability” (October 2014) & SES Thailand But plenty of opportunities… …in infrastructure Government approved THB 3.3 trn (CAD 120 m) for infrastructure projects • Rail (urban & inter-city) • Road • & auction for 4G LTE internet licences Thailand Infrastructure projects (win/win) Direct investment flow: Related private sector opportunities – materials, construction, finance Indirect investment flow: Infrastructure expenditure flows through to consumers – retail, finance Needs to happen pretty quickly! But.. The difference that the AEC will make this year… Thailand - ASEAN 2015: Year of the AEC! Not really!! • Officially due to start 2015 but reality is a long process e.g. European Union single market • ASEAN countries today have far less in common now than EU countries did in 1992 • EU has important structures in place: • a legislative body (Parliament) • a watchdog to ensure laws adhered to (European Commission), • court process (ECJ) to resolve disputes (individuals or states vs EU or states) Thailand Capital Outflows… • Ahead of inheritance & property tax reforms or • Any perceived setbacks in Thai recovery or delays in infrastructure spend… … may lead to BoT cutting rates (weaker Baht) Could exacerbate capital outflows in Thailand Thailand - Summary Baht will…. …strengthen when it becomes apparent G7 interest rates won’t rise, …strengthen more on ongoing political stability/successful infrastructure, …strengthen even more when G7 resorts to more stimulus …weaken if BoT cut rates, …weaken further in any political or legitimacy crisis …weaken even further when tax outflows take place Could see swings of +/- 5-10% through the year Thailand - Summary Ultimately hostage to the rest of the world - leaving SET/risk assets especially vulnerable to exogenous shocks this year Although RoW is in bad shape, global CBs are unlikely to give up without a fight, so assuming those shocks self-correct then it all becomes about the domestic story Even with declining global trade as long as the political situation remains stable and as long as infrastructure is implemented the outlook is: Volatile but moderately bullish for the SET Very bullish for parts of it Supportive of property and fixed interest Overall: cautious with very selective risk focus Thank you! Disclaimer This commentary has been prepared using information based on the research capabilities of MBMG Group and represents the current opinion of MBMG Group. The opinions expressed are subject to change without notice. Where information has been sourced from parties outside MBMG Group, these are generally believed to be reliable but reliability and accuracy is not guaranteed. This commentary is for informational purposes only and does not in any way constitute investment advice and should not be construed as an offer to sell, a solicitation to buy, or an endorsement or recommendation of any company or security in any jurisdiction. Nothing in this document constitutes a formal legal opinion or constitutes investment advice. Each reader should consider whether this research is entirely or partially suitable for their particular circumstances and, if appropriate, seek additional, specific, professional advice. Neither MBMG Group nor its officers can accept any liability for the consequences of any action taken or not taken as a result of reading this commentary. MBMG Group is an independent researcher of information and does not provide investment advice or asset or financial management in Thailand. MBMG Group is affiliated with MBMG Asset Management Limited, a Mauritian institution that is authorized and licensed to provide investment management services in Mauritius. All investments contain risk and may lose value and past performance is not a guarantee or reliable indicator of future results.