Be careful what you wish for!

Be
careful what you wish for. A year ago, a major UK bank was not
allowed to acquire Lehman Brothers which
wound up in bankruptcy. The British Chancellor of the Exchequeur told
his US counterpart, Treasury Secy. Paulson, “we do not want to
import your cancer.”

Perhaps in revenge,
the bank in turn refused to accept British government bailout money,
instead turning to shareholders and fatcats from the Middle East and
Asia to build up its capital cushion. Most rival banks in the US and
Britain did not dare say no the way our choice bank did.

That means it does
not have to put up with government interference, telling it to lend
more to desperate mortgage debtors, or trying to cap executive
bonuses. As shareholders, we also are happy that it is not having to
divert money away from improving its capital rations and paying
eventual dividends to us to satisfy government overseers.

Today,
for paid subscribers, we look at what happened to the defeated
British buyer, whose stock we think has further to go. It has become
a much more diverse bank, by product and geography, as well as being,
as it was already a year ago, too big to fail. With a more diverse
and international business, the bank can better absorb write-downs
and reserves for potential losses.

Here
is a comment on the bank in question from banking analysis shop Keefe
Bruyette & Woods:

“The
goal is for the international profit contribution to equal that of
the UK (1H09 18% PBT/40% income). Management sees further growth
opportunities in Africa and Western Europe (e.g., recently announced
insurance JV with CNP). In addition, it will look to grow its Asian
retail businesses following recent investment in India, Pakistan and
Indonesia.”

Pre-subscribers
may be able to guess the name of the bank, one of our best performers
this year. Paid subscribers know what bank we are talking about. When
I tipped this stock I told my husband I expected it would pay off as
well as our purchase of bonds from Telefonica
de Argentina,
now sold, which I recommended at the height of the Argentina crisis
after a lightening visit to Buenos Aires to double check the terms
and conditions. I have been doing global stock and bond advise for
subscribers for over 20 years. There is risk, but it is controlled,
as it is for this Brit bank.

It isn’t done yet.
This British baby has more growth in store. To read on, please
subscribe. Your portfolio will benefit.

*Ethics
can be inefficient. Yesterday we ran an article by Chris Loew on STOCK X
whose ticker he gave as FNOEF.PK. Not only did Vivian have to buy the
maker of a great potential system to on-board Internet inside Japan
rather than by ADR, as she reported later in the day. Chris also had
to buy in Japan. We do not front-run our readers.

*Now
a word from contributor Paul Renaud, of Phuket, Thailand, who edits
www.ThaiStocks.com, now a
free service clients can sign up for:

Surely
the past 12 months have been a most unusual time in the investment
business, due to the western induced financial crisis.

Last
week I had a chance to invite K. Chanitr (MAI exchange president) for
lunch and catch up on why the MAI index has been lagging the
big-stock SET so much this year to date. The MAI index is up 12.97%
for the past six months, 3.18% for the past 3 months, and only 11.59%
year to date, considerably less then the SET index which is up
52.10%, 13.28%, and 46.01% respectively for these period.

(To
be fair, my latest model had a few outperforming MAI selections, like
DEMCO. This selection I re-visited for us last month, just before the
latest price surge from 2.60 to over 3.90.)

Yet,
the big important call this year was to stay invested and ditch the
pessimists as many got whipsawed getting out earlier this year. The
less good call was to keep overweight MAI stocks, up until now. We
had near or equal SET index performance since mid April ’09. Back
then I wrote that the time has come where the Thai political discount
would narrow going forward and the world economies likely recover.

But
yet why such a broad MAI/SET divergence? Is the long-outperforming
MAI exchange lagging now an opportunity, or the start of something
new? In past years smaller cap stocks, in general, outperform the SET
index. So what is happening?

In
the US, long term studies show small cap superior performance over
time, and this despite the fact that, unlike here in Thailand,
smaller cap stocks usually trade at above average p/e ratios compared to big cap. This is normal, because a company which has say
double a long term growth rate as compared to another, should deserve
more then double the valuation. Smaller cap niche companies have
higher long term growth rates, on average. Note that in the US and
other more developed markets, smaller cap growth stocks rarely pay
any cash dividends, unlike here. Thai smaller caps pay high amounts
of dividends, often double the SET averages. It was such high
dividends and niche companies which convinced me to remain mostly
smaller cap-focused during the global recession of 08-09.

Here
are some of the reasons why this divergence this year:

1) The SET, recently, is mostly energy, petrochemical, and bank stock dominated. One of the surprises as year 2009 progressed was how the price of oil rebounded, just about doubling from its low price early this year. This had a dramatic effect on those share prices, which benefitted from higher oil prices (even more so as is perceived in a magnified way by investors).

2) Thai banks were not much affected by the banking crisis cooked up in the West, as they never got involved in complex derivative strategies, US housing ninja/toxic bonds and that whole mess. Thai banks were mostly bystanders to the global financial crisis. Unlike in the West no Thai bank got into trouble.

3) Most smaller cap MAI stocks are in primarily exports and/or manufacturing. As the global crisis unfolded, they got hit -as both exports and manufacturing slowed down. Again, this is magnified because investors lumped all the MAI stocks together with one given label, regardless of industry or exposure and decided to avoid them. As it turned out, this perception was not off.

4)
Net profit margins decreased more on the average MAI stock than on
the average SET firm and high dividends were held back in ’09, part
due to the average MAI company being shocked and confused by the
rapidly deteriorating global economies. So many decided to preserve
cash. Yet, 42 of the 53 MAI companies remained profitable.

5) No large cap SET company is a primary exporter nor a manufacturer. The SET index is weighted by market cap, which means the large oil/petrochemical and bank stocks make up most of this index. The bigger the company the more influence on the SET index.

6) In past economic cycles many institutional investors decided to stick to core positions in Thailand and only make percentage increases or decreases. This financial crisis was of such scary magnitude that by late ’08, they eliminated just about all their Thai stock exposure. When they saw by 2Q, that “the world as we know it would not end”, they decided to come back with vigor to re-establish their previously long held core positions.

This magnified the SET stock sell-off late last year and equally magnified the bounce-back this year. Surely the SET index should have never dropped to 380, close to 12-year “Asian Crisis” lows!This swing factor magnified the initial casual observations that MAI companies are now falling behind.

What
this shows again is how volatile over time large-cap SET stocks are.
They overshot on the downside late last year and now are catching up
and then some mostly due to the resurgence of stock markets worldwide
as of Sept ’09.

This
has beaten all previous upbeat expectations.While there may be
some overdone euphoria at present with the index around 700, there is
no denying economies are coming back from the proverbial grave and
the bears were plain wrong.

But
then we must ask: if things getting better and much faster than
expected, with global economies bouncing back already, led by China,
can we reasonably expect the MAI index will catch up? These stocks
are exposed more to the real economy then the SET large-cap. Also, if
the average MAI company preserved cash by taming dividends this year,
does this not bode well for the future, as these companies overall
are now stronger then ever.

My
call is that as the global economies continue to recover, so will the
MAI and the smaller cap stocks. And It does not matter much if this
recovery comes from China/India or the US. There will come a time, in
the future or maybe started already, when these stocks catch up, as
the global recession fears now fade.

That
is why now a good time to get going.

There
has been a lagging period and I did not see it coming. But as the
market progresses forward, it reverts back to its long term trend, in
this case longer-term outperformance by smaller high growth companies
with larger dividend rates along with less volatility than large cap
stocks. Why? Higher longer term growth rates, lower p/e valuations,
and double the SET average dividend yields. The timing of this is
“any time now”.

My
investment thesis remains intact: favor smaller cap growth companies
for investment in Thailand’s now more vibrant stock market.

*Paul
is big on the need to conquer obesity, and note that the market for
products for flab will sextruple by 2018 according to a recent study.