Crystal Ball:The Year Ahead in

Capital Markets

Paul Gambles14th January 2015

DisclaimerThis commentary has been prepared using information based on the research capabilities of MBMG Group and represents the current opinion of MBMG Group. The opinions expressed are subject to change without notice. Where information has been sourced from parties outside MBMG Group, these are generally believed to be reliable but reliability and accuracy is not guaranteed. This commentary is for informational purposes only and does not in any way constitute investment advice and should not be construed as an offer to sell, a solicitation to buy, or an endorsement or recommendation of any company or security in any jurisdiction. Nothing in this document constitutes a formal legal opinion or constitutes investment advice. Each reader should consider whether this research is entirely or partially suitable for their particular circumstances and, if appropriate, seek additional, specific, professional advice. Neither MBMG Group nor its officers can accept any liability for the consequences of any action taken or not taken as a result of reading this commentary.

MBMG Group is an independent researcher of information and does not provide investment advice or asset or financial management in Thailand. MBMG Group is affiliated with MBMG Asset Management Limited, a Mauritian institution that is authorized and licensed to provide investment management services in Mauritius. All investments contain risk and may lose value and past performance is not a guarantee or reliable indicator of future results.

What will the capital markets do in 2015?

2015 Outlook2015 Outlook

They will…

… … FLUCTUATE!FLUCTUATE!

J Pierpont Morgan

2015 Outlook2015 Outlook

Capital market trends depend on countless factors, including:

•Economic performance (local, regional & global)

•Public, market & media perception of local & global issues

•Policy & politics (central banks’ policies & governments’ policies)

•Investors’ capacity and propensity (often overlooked)GDP

Debt deflation:

The last global debt deflation was The Great Depression

2015 Outlook: Global2015 Outlook: Global

High levels of PRIVATE debt constrain spending

This is being masked by artificially stimulated unsustainable asset bubbles

One country has already experienced 25 years of this…

Japan:2015 Outlook: Global2015 Outlook: Global

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1980 1984 1988 1992 1996 2000 2004 2008 2012 20160

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250

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Japanese Gross Private & Government Debt

www.debtdeflation.com/blogs

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2015 Outlook: Global2015 Outlook: Global

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 20166

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8

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Debt ChangeUnemployment

US Private debt change & unemployment

www.debtdeflation.com/blogs

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The United States is turning Japanese

2015 Outlook2015 Outlook

To avoid the Japanese disease, Central Banks needed to be more creative in their stimulus solutions…

… but most seem reluctant to let go of QE and austerity

= which only delays the inevitable re-set

= but until then Central Banks call the shots= but until then Central Banks call the shots

For Thai capital markets…

2015 Outlook2015 Outlook

Still 3 main challenges

• Political stability

• International trade

• Private debt levels

Trade…

Weakening global demand

ThailandThailand

Figures: Bank of Thailand

But trade with LVMC countries still growing

Thailand - ASEANThailand - ASEAN

Opportunities in physical and digital infrastructureSource: Bank of Thailand

LVMC Imports (% Total)

High level of private debt…

ThailandThailand

Sources: BOT Paper “Rising Household Debt: Implications for Economic Stability” (October 2014) & CEIC

…especially in lower income bracket

ThailandThailand

Sources: BOT Paper “Rising Household Debt: Implications for Economic Stability” (October 2014) & SES

But plenty of opportunities… …in infrastructure

ThailandThailand

Government approved THB 3.3 trn (CAD 120 m) for infrastructure projects

• Rail (urban & inter-city)• Road• & auction for 4G LTE internet licences

Infrastructure projects (win/win)

ThailandThailand

Direct investment flow:Direct investment flow:

Related private sector opportunities – materials, construction, finance

Indirect investment flow:Indirect investment flow:

Infrastructure expenditure flows through to consumers – retail, finance

Needs to happen pretty quickly!

But..

The difference that the AEC will make this year…

2015: Year of the AEC!

Thailand - ASEANThailand - ASEAN

Not really!!

•Officially due to start 2015 but reality is a long processe.g. European Union single market

•ASEAN countries today have far less in common now than EU countries did in 1992

•EU has important structures in place:• a legislative body (Parliament) • a watchdog to ensure laws adhered to (European Commission), • court process (ECJ) to resolve disputes (individuals or states vs EU or states)AEC does not have these

Capital Outflows…

ThailandThailand

• Any perceived setbacks in Thai recovery or delays in infrastructure spend…

… may lead to BoT cutting rates (weaker Baht)

Could exacerbate capital outflows in Thailand

• Ahead of inheritance & property tax reforms

or

Thailand - SummaryThailand - Summary

Baht will….

…strengthen when it becomes apparent G7 interest rates won’t rise,

…strengthen more on ongoing political stability/successful infrastructure,

…strengthen even more when G7 resorts to more stimulus

…weaken if BoT cut rates,

…weaken further in any political or legitimacy crisis

…weaken even further when tax outflows take place

Could see swings of +/- 5-10% through the year

Thailand - SummaryThailand - Summary

Ultimately hostage to the rest of the world - leaving SET/risk assets especially vulnerable to exogenous shocks this year

Although RoW is in bad shape, global CBs are unlikely to give up without a fight, so assuming those shocks self-correct then it all becomes about the domestic story

Even with declining global trade as long as the political situation remains stable and as long as infrastructure is implemented the outlook is:

Volatile but moderately bullish for the SET

Very bullish for parts of it

Supportive of property and fixed interest

Overall: cautious with very selective risk focusOverall: cautious with very selective risk focus

DisclaimerThis commentary has been prepared using information based on the research capabilities of MBMG Group and represents the current opinion of MBMG Group. The opinions expressed are subject to change without notice. Where information has been sourced from parties outside MBMG Group, these are generally believed to be reliable but reliability and accuracy is not guaranteed. This commentary is for informational purposes only and does not in any way constitute investment advice and should not be construed as an offer to sell, a solicitation to buy, or an endorsement or recommendation of any company or security in any jurisdiction. Nothing in this document constitutes a formal legal opinion or constitutes investment advice. Each reader should consider whether this research is entirely or partially suitable for their particular circumstances and, if appropriate, seek additional, specific, professional advice. Neither MBMG Group nor its officers can accept any liability for the consequences of any action taken or not taken as a result of reading this commentary.

MBMG Group is an independent researcher of information and does not provide investment advice or asset or financial management in Thailand. MBMG Group is affiliated with MBMG Asset Management Limited, a Mauritian institution that is authorized and licensed to provide investment management services in Mauritius. All investments contain risk and may lose value and past performance is not a guarantee or reliable indicator of future results.

Thank you!Thank you!