By Paul Renaud
Introduction
One of the main founding themes at www.Thaistocks.com is that the Stock Exchange of Thailand (SET) is wrongly regarded as a day trading 'gamblers den' for those who enjoy trading in highly speculative stocks in emerging markets.
For years, Paul Renaud has been unearthing hidden stock gems that go along the theme of high dividends, promising growth and lower price volatility. Frequently, these stocks were small to mid sized cap stocks that institutional investors and the media ignored due to the lack of liquidity to suit their own needs. This so called lack of liquidity did not prevent individual private investors from investing in these and cashing in with remarkable gains, as documented all along. These types of companies are the true drivers of the Thai economy. With his 15 years of SET investment and wealth management experience Paul Renaud long ago noticed a trend: The most speculative stocks on the Stock Exchange of Thailand tend to be the largest capitalized companies within their respective sector.
The following mini-study attempts to prove this assertion by analyzing the average 3-year betas of large caps and comparing them to the average beta within their sector. Thaistocks.com asserts that if investors look beyond the largest stocks on the SET there are some hidden gems that have low volatility while at the same time bring impressive returns along with high dividend yields.
Beta Primer
The beta coefficient is defined as the amount of systematic (or market risk) present in a stock relative to the average amount of risk present in all stocks (in this case the SET). The average amount of systematic risk in all stocks has a beta of 1.0. A stock with a beta of 0.50 will have half the amount of systematic risk compared to the average, and a stock with a beta of 2.0 will have twice the amount of risk present. The premise is that the higher the beta for a stock, the higher the volatility.
Methodology
Using investment research data prepared by the Thai Broker TISCO Securities, Thaistocks.com obtained 3-year betas for all Thai stocks. The 3-year betas were calculated in the last quarter of 2003. The twelve largest sectors, representing 88% of the SET index, were then chosen to be analyzed. Companies that had halted trading but still listed were eliminated from the study. Companies that had recent IPO s were included in the study. The average 3-year beta was then calculated for each sector. Next, the largest companies in each sector were chosen. This was done qualitatively, which resulted in 2 to 5 large caps being selected in each sector. The average beta was then calculated for the large caps in each sector, and then compared to the sector average beta.
Results
The results are summarized in the table below. The assertion that the larger cap stocks are more risky relative to other stocks in their sector was proven true in 10 out of the 12 sectors analyzed. The two sectors in which the assertion was not true were the Communications and Energy sectors. The average large cap stock had a larger beta of 0.24 than the average beta of stocks in its sector.
| Sector | % of SET Index | Avg. Beta | Avg. Beta Large Caps | Difference |
| Energy | 16.7 | 0.9270 | 0.8760 | -0.0510 |
| Banking | 13.84 | 1.1692 | 1.3125 | 0.1433 |
| Building | 11.24 | 0.9523 | 1.0525 | 0.1002 |
| Communications | 10.23 | 1.3267 | 1.1050 | -0.2217 |
| Property | 9.31 | 1.0476 | 1.4100 | 0.3624 |
| Chemicals | 4.83 | 0.7142 | 1.7867 | 1.0725 |
| Rehabilitation | 4.79 | 0.5948 | 0.8267 | 0.2319 |
| Finance | 4.18 | 1.3172 | 1.9225 | 0.6053 |
| Transportation | 4.10 | 0.9714 | 1.1050 | 0.1336 |
| Entertainment | 3.26 | 0.8100 | 0.9767 | 0.1667 |
| Commerce | 2.83 | 0.4153 | 0.6100 | 0.1947 |
| Agribusiness | 1.45 | 0.4057 | 0.5350 | 0.1293 |
| Average Difference: | | | | 0.2389 |
Interpretation
The average difference of 0.24 represents a significant amount of increased systematic risk for the large-cap stocks. This tells investors that when analyzing a sector and choosing companies within the sector that bigger is not always better. The combined increased risk of larger-caps along with the facts of low-dividend yields and poor performance over the past several years does not result in an encouraging outlook for the larger-caps. This goes along with the investment strategy that Thaistocks.com has followed over the years of focusing on medium sized companies and adding a select few large caps to balance the portfolio, while at the same time keeping a close eye on total volatility.
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