Trust & Integrity: How Thai Politics Punish A Nation

Rumors, denials, accusations, shadow plays, a third hand in action and the blaming of others … there’s never a dull moment in Thai politics. The consequence being that investors have long lost confidence. Thailand’s financial markets are by no means attractive these days. Here’s why, from a financier’s perspective:

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:

Industry, Economic & the SET: Trust & Integrity Key to Higher Participation in the SET/MAI

By Paul A. Renaud*, ThaiStocks.com

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 the U.S. 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.

A Dutch central bank 2,000-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 of Economics 2.0 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.

* Paul A. Renaud is the founder and owner of ThaiStocks.com and a resident of Phuket. He moved some twenty years ago from Morgan Stanley in the U.S to Thailand where he’s analyzing the Thai stock market ever since. Renaud’s key picks are based on growth, low valuations and high dividends.




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October 28, 2009 | Filed Under Business & Economics, Politics, Property & Investment 

Comments

4 Responses to “Trust & Integrity: How Thai Politics Punish A Nation”

  1. Rich on October 28th, 2009 1.53 pm

    A caveat on the following; of course it is a sweeping generalisation but being so does not make it wrong. There are specifics to do with the Thai persona, the “self-image” but to discuss this would get into seriously hot water were it and its origins to be discussed.

    Unfortunately, swindling is a characteristic of the Thai, probably for two reasons: firstly because the education is so poor and does not emphasise ethics, social responsibility and democracy. Secondly because despite all of the evidence to the contrary, the Thai secretly believes that to be a Thai is to be superior to other races, and swindling implies you are smarter than the victim. It’s a self-esteem thing. Of course, Thais swindle each other as well (eg the disgraceful and blatant stealing by politicians from the public purse).

    I have long believed that the Thai propensity for dishonesty and a sometimes creepy lack of integrity would eventually consign Thailand to the ranks of failed states; states with whom nobody save the dregs of humanity wishes to do business. It does look as though that belief is steadily being proved right. One really delicious proof of this is that after decades of IP, software and pharmaceutical rip-offs and theft, the U.S. has now generated a copy of the Thai Jasmine rice. The choice of name (Jazzman) cannot have been other than rubbing the Thai noses in it. And my goodness, how they squealed.

    Thais do not recognize irony. Or poetic justice, but you would have thought they recognize revenge when they see it, after all, this is one of the major Thai motivators.

    I believe that unless Thais change their ways, in 10 years, Thailand will be a failed nation and Thais will have become the trailer trash of SE Asia.

    Rich

  2. bosunj on October 28th, 2009 4.47 pm

    It takes alot of cheek to hold forth on the trustworthiness of the “markets” during the ongoing and ever worsening of the ponzi scheme generally referred to as Wall Street. Even more cheek to suggest that Thais need to aspire to Wall Street’s lofty example.

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  4. Steven on November 11th, 2009 12.55 pm

    The author of this article makes me laugh. I am reminded of the biblical reading “He that has no sin cast the first stone.” It may be true what the author says but it is also true that this same person cherry picks his own accomplishments and pushes aside his failures in the quest for more subscribers and more profit. Too bad for those that find this out after they have shelled out a considerably large amount of cash for a subscription that does not reap anymore than if they just chose stocks for themselves.

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