High return seen in equities

August 16, 1999 -- DESPITE the recent battering of the stock market, Nakornthon Schroder Asset Management believes that equities are expected to deliver strong returns over the next three to five years.

Here's the view of the professional fund manager. Douglas Cairns, chief investment officer of Nakornthon Schroder Asset Management, has sent out a strong message that Thai investors should be putting their money into stocks now if they do not want to lose out a good chance to increase their wealth in the longer term.

Comparing the risk and rewards of the stock market and an estimated three-month bank deposit, Nakornthon Schroder found that between now to July 2004, the actual return of stock market at a SET index of 900 will be 100 per cent or an annualised rate of 15 per cent. At the same time, the actual return of the three-month deposit is 37 per cent or an annualised rate of 6.5 per cent.

''Investors with market exposure should significantly out-perform estimated three-month bank deposits,'' Cairns said.

He also made a comparison study between the historic long-term returns on the Dow Jones and the SET. The last recession in the US was at its worst in 1991, with the Dow Jones standing at around 3200. From 1992, however, as the economy and business environment began to recover, the market moved from 3350 to 10,600, offering investors with market exposure a return of over 215 per cent.

''True, the US cycle has been exceptional in its longitude, but it still offers an example of how investors can benefit from long-term recovery,'' he said.

Turning to the SET, in 1997, as Thailand's economy emerged from its last devaluation and recession, the stock market rose from about 250 to 12000 at the peak of the economic cycle in 1996, representing a return of 380 per cent over this period. Again, it can be argued that this was an exceptional period of economic growth, but it does emphasise the potential for long-term returns from 1999 onwards as the economy and business environment recovers.

Cairns quoted a recent study in the US by two academics of the four million ''millionaire households'', which revealed that long-term equity savings are regarded as a ''foundation for wealth''. Of those surveyed, 95 per cent owned equities, and most of those held 20 per cent of their net wealth in this asset class. Furthermore, 91 per cent held a company's shares for more than one year, and 32 per cent held shares for over six years. Additionally, 42 per cent did not trade their portfolios in the year prior to the survey.

It is clear that a long-term buy and hold strategy is a strong theme for wealth in the US.

A recent survey by Paribas Asia Equity of retail equity investors in Thailand revealed a different story. Of those surveyed, 44 per cent held shares for less than one week, and 75 per cent held for less than one month. What is the risk?

''You can make a short-term profit in a short-term rising market, but equally you may make a loss if selling into a short-term declining market. Above all, many short-term investors may lose out on the anticipated long-term recovery using a short-term trading strategy,'' Cairns said.

The biggest challenge for many investors is to alter their perception of risk. Cairns said: ''Take a long-term view, do not worry so much about short-term market movements, and focus on the potential for long-term returns. Although it is impossible to ignore the short-term market movements and volatility, instead of being tempted to sell on a short-term decline, use this as an opportunity to buy more shares or equity fund units, and gain greater benefit from the long-term recovery.''

Here is Cairn's steps for long-term investment:

- Set aside a portion of savings,

- Buy and hold equities/equity funds,

- If you have no time to research equities, invest with professional fund managers,

- Select equity fund with consistent tract record, and

- If short-term market decline, buy more units.

Moreover, investors can also consider establishing regular investment, monthly as part of a long-term savings plan. Many overseas investors reap the benefits of this approach as the dollar cost averaging of fixed payments buy more units on any market decline.

The benefit of equity mutual funds is that if you wish to divest, or take a profit, you can do so on any normal business day, with administrative ease.

BY THANONG KHANTHONG