Dear rss free blog,
Paul
Renaud of www.thaistocks.com
writes from Phuket, Thailand: In
economic transactions and stock markets, trust in the integrity of
market players, brokers, and institutions is the key. The Thai
exchanges should hear the wake-up call to provide what is needed to
get more people to view stocks as a form of legitimate savings.
Trust
explains a major part of differences in equity preferences of a
culture. Higher trust, even more important then better investor
education, is needed to reduce the high discount in valuation of Thai
stocks.
For
smooth and successfully functioning financial markets, investors’
trust in other individuals, companies, and brokers is of paramount
importance. People will only invest in shares if they are sure they
are not being defrauded. Investing in stocks not only requires an
assessment of the risk-return trade-off based on existing data and
analysis. It also requires trust that the data are reliable and that
the overall system is fair. This mostly means: cheaters are punished
and their bad actions published. How does Thailand fare on these
criteria?
It
is hard to understand important differences between stock markets
around the world like investor participation levels and different
valuations. Until a few years ago, economists were unable to explain
why some residents invest far more than others in home country stocks
than others. Why for example do people in USA and Sweden invest far
more heavily in shares, than residents of all other countries?
The
insightful book “Economics 2.0” by Professor Norbert Harin and
Olaf Storbeck (2009) provides us with the clear answers. The
researchers demonstrate that trust plays a major part in explaining
the differences in equity culture. Only 7.2% of Americans and a mere
6% of Swedes say they do not trust their countries’ major
corporations at all. In Germany and Italy the corresponding figures
are over 17% and these discrepancies are even more pronounced for
highly affluent people. In Sweden only 2% of the rich doubt the
integrity of business while in Italy the figure is 29%. No wonder
that in Sweden only 4% of the wealthy stay away from stocks while in
Italy 35% do.
The
Dutch central bank 2000-person survey found that those expressing
the opinion that most of those around them can be trusted are 50%
more likely to own shares and moreover will also invest a 3.4% larger
portion of their wealth in shares. While this sounds like a small
number, it’s huge relative to the country’s pool of total private
savings.
While
an increasing level of education will diminish the significance of
the ‘trust effect’, this does not cancel out its overriding
dominance. The lack of trust, either generalized or personalized,
reduces the demand for equities.
And
lower demand reduces the country’s p/e valuations. For a country’s
capital markets, this is a huge price to pay.
No
numbers are given for Thailand. But even a p/e re-rating of a few
notches would increase the total market value by many billions’ of
Baht. “ The authors write: ‘In countries where the trust level is
of lower levels, implies stocks will be more difficult to list and
command lower valuations, which penalized the companies, the
investors and the economy as a whole’.
I
am reminded of a 2003 book, ‘Credibility. How leaders gain and lose
it, why people demand it’ by Kouzes and Posner. These authors cited survey after survey on what peoples more then anything want
from leaders: honesty. Credibility and honesty are the core
foundation. Kozes and Posner wrote: Honesty and crediblity are (by
far) ‘the key attributes desired in leaders’. They outranked
progress, inspiration and even competence. Credibility is mostly
about consistency between words and deeds.
The
single biggest reason why few Thais and foreigners invest in stocks
here is due to their perceived concerns over integrity, honesty, and
credibility in corporate accounts and with regulators’ often aloof
inaction over addressing accounting issues with more than mere words
or idle warnings.
When
this changes for the better, the average Thai stock will be valued
upwards, toward their to regional average levels. Huge new wealth
will be created.
Vivian
adds: for agita about a better-known Asian stock exchange with
compliance issues, Hong Kong, a Zimbabwe-born readers suggests visiting http://webb-site.com/articles/issuemandate.asp
Because
I am attending a Financial Times conference on the Future of
Capitalism tomorrow, there will be no newsletter. This is a pretty
important subject after all. There will only be a short newsletter on
Thursday because I am attending a luncheon on whether the emerging
markets boom can continue, sponsored by Bank of New York Mellon in
the Snoopy building. Moreover, next week I leave for Europe on the
3rd returning the 23rd in time for Thankgiving.
I will be going to Berlin for my husband’s college reunion (he went
to Oxford but they are celebrating in Berling); on to Prague where
our Japan correspondent’s Loew ancestors came from; then to London
for business, and back for what Art Buchwald called Le Jour de
Merci-Donnant.
Vivian
adds for paid subscribers:
to
benefit from Paul’s work in Thailand, we have long recommended a top
performing list of locally traded shares he recommends. They are up
an average of 80% so far this year. But not everyone has the means or
the energy to buy on the Thai version of Nasdaq, the MAI where Paul
does his legwork.
