Monday, March 25, 2013

Thailand’s Officials Flexes Muscles on Domestic Stock Market Bubbles

To deny that today’s asset market prices have been mainly driven by social policies is to see only a segment or an incomplete picture of reality.


I mentioned last week that Thailand’s SET has overtaken the Philippine Phisix as the latter saw the bulls hibernate. Yet in a snap of a finger, dramatic changes occurred.

Thailand’s SET nosedived 7.5% this week, with Friday’s huge 3.3% losses accounting for nearly half of the week’s quasi panic selling. This week’s “biggest slump since 2008” basically halved the SET’s year-to-date gains: yes, 7.5% losses in one week.

News reports say that the mini crash accounted for “forced sales on margin accounts”[1] in response to expectations over an increase on “margin requirements on trading”. 

The Thai bourse said that the level of collateral for account holders will be increased to 20% of the credit line from 15%[2] or an additional 5% of collateral will be required for every credit line used.

We are not even talking about market responses to a bubble bust or from interest rate spikes, but from an arbitrary edict by the Thai bourse aimed at allegedly reducing “risks to the clearing system” as well as to “help reduce volatility”.

The Stock Exchange of Thailand (SET) seem to be a government agency, since it is a “juristic entity set up under the Securities Exchange of Thailand Act, B.E. 2517 (1974)”, according to the[3].

Yet if markets have all been about “fundamentals” and “earnings”, then why the aggregate brutal reaction to what appears as a tightening directed by political officials on stock market participants?

The vehemence of selling pressures incited by the “forced sales on margin accounts” only goes to demonstrate how leveraged Thai’s equity markets have been.

Importantly, this also reveals how policymakers can act unilaterally at the expense of the politically unconnected public.

Thai officials seem to sense of a bubble in progress, then precipitately decides tighten.

But their campaign appears to be hinged on a piecemeal approach targeted at a specific asset class.

The actions by the SET essentially reflect on the recent statements by Deputy Governor of the Bank of Thailand, Mr Pongpen Ruengvirayudh, who I recently cited[4].

The Thai official seems to have a good basic comprehension of the nature of bubbles and has recently acknowledged of the considerable growth of the nation’s systemic credit. But he ambivalently dismissed the prospects of the risks of a bubble in presupposing that their actions will successfully contain them.

So I would read the SET’s recent activities in the context of Mr Pongpen Ruengvirayudh’s declarations; where Thai officials will target specific asset markets for bubble containment measures.

Yet it is unclear if the SET’s latest policies will fundamentally impair the prevailing bias.

This will really depend AGAIN on the prospective actions of SET and other regulators, particularly the Bank of Thailand (BoT).

Interventions basically engender uncertainty. And markets disdain uncertainty. However this axiom would only be true if interventions don’t cover monetary easing or credit expansion. The global financial markets have thus far slobbered over central banking stimulus.

In corollary, the contemporary steroids addicted financial markets detests interventions that are based on “tightening” or “withdrawal”

For the meantime, the recent decree on margin trades will translate to an adjustment window from the policy induced uncertainty made by SET’s latest “tightening”. Thus Thai equities are likely to struggle.

Market participants will then assess if SET officials will continue to foist uncertainty through more ‘tightening’ interventions, or if the authorities will allow markets to function. If the former, then Thai’s equity markets would have more downside bias going forward. If the latter, then Thai’s mania may catch a second wind.

It would also be misguided to assume that assaulting stock markets will extrapolate to the suppression of bubbles. Such actions represent as dealing with the symptoms rather than the disease.

China’s stock market, as measured by the Shanghai Stock Exchange Composite[5], remains in consolidation at the bear market troughs.

But the object of manias via rampant speculation and credit expansion has only been diverted to the property markets.

Stock market bubbles seem as easier to control politically compared to property bubbles. That’s because the former operates on centrally organized regulated platforms as against the latter which represents a localized, diversified and fragmented market.

In servicing the financial needs of the highly dispersed property sector, banks frequently engage in off-balance sheet transactions combined with other nonbank entities or intermediaries. They are resorted to by many firms in order to circumvent or skirt regulations. These companies represent the shadow banking industry[6].

Such phenomenon hasn’t been limited to China[7] and the US[8] but has evolved to cover much of the major economies of the world[9]

The global pandemic of bubble policies has mainly fueled their rise. Also, shadow banking has been a function of regulatory responses by markets as well as political entities (like the local governments of China). Yet the more the regulations, the bigger the shadow banks.

It’s been an incessant cat mouse game between regulators and market forces.

As I recently pointed out, the feedback on the newly imposed property restrictions on China’s property markets has prompted people to exploit legal loopholes. Incidences of divorce have skyrocketed as married couples use the divorce route to bypass new regulations[10].

Another example, Malaysia’s string of legal restrains likewise has failed to prevent the recent surge in property prices[11] which the IMF admitted they failed to see beforehand.

So Thailand’s tepid approach in dealing with her bubbles will hardly meet the objectives of managing them. The bubble caused by easy money policies isn’t likely to stop; they will only shift, unless the authorities deal with the real cause.

Officials may deny that bubbles pose as public risk. But they are beginning to tinker with the markets in order to rein them. This means they are admitting indirectly to the menace which they publicly reject. We call this demonstrated preference or action speaks louder than words.

Nonetheless, Thailand’s experience shows how highly sensitive or fragile markets are to the prospects of tightening. 

The attack on Thailand’s stock market by their authorities to quash homegrown bubbles is a lesson that should be relevant for world markets or for the Phisix.

[2] Thai Stocks Post Worst Week Since 2008 on Margin Rule Change March 22, 2013

[6] Shadow banking system

[10] Finance Asia Property tax exposes Chinese pragmatism March 20, 2013

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