Retail investors are fleeing to high-yield dividend plays and shunning fixed-income funds after the latter became subject to a 15% tax.
After the tax was introduced, investors shifted their money from fixed-income funds to dividend plays, said Visit Ongpipattanakul, managing director of Trinity Securities.
"The SET High-Dividend Index (SETHD) outperforms other SET indices because of the 15% withholding tax," he said.
As of Sept 14, SETHD had the highest annual return, 3.27%, among the SET index series. The SET50 index had a meagre 0.07% return, while mid caps and small caps performed even worse because of a 18% slump in the Market for Alternative Investment.
Siam Cement Plc (SCC), for instance, is offering a 4% dividend yield, while the one-year fixed deposit rate is 1.3-1.4% and term funds have an average return of 1.8%, Mr Visit said.
The cabinet recently approved the tax tweak as a means to reduce inequality and the inequity in taxation between investment in debt securities directly and in debt securities through mutual funds.
Individuals who invest in debt securities or deposits in banks are subject to a 15% withholding tax rate on interest, profits or discount, while investment in mutual funds with asset allocation in debt instruments was exempt from the tax before the 15% withholding came into effect. Fixed-income fund unit holders at that time were subject to only a 10% withholding tax on dividends.
But fixed-income funds established before the law's enforcement, as well as retirement mutual funds (RMFs), remain tax-exempt.
Mr Visit said high-yielding dividend plays always have low volatility and thus protect investors amid wild swings in the market.
In a related development, Mr Visit said the foreign sell-off in Thai shares continues as overseas investors pour money into local bonds because the baht is considered a safe haven.
"Foreign investors, especially passive funds, sold Thai shares at nearly a net 200 billion baht this year after Chinese stocks were included in the MSCI index," he said. "Active funds have stayed away from the Thai capital market because its forward earnings per share (EPS) is not attractive."
According to Trinity's calculations, the Thai bourse's forward EPS is 118 baht and the SET index, based on the 12-month rolling average and price to earnings (P/E) ratio of 15.5, should be at 1,829 points.
The 15.5 P/E is an averaged figure over the past six years.
Mr Visit said the SET's volatility should continue in the short run and is expected to pick up after the US mid-term election takes place.
"There are few risk factors that will affect fund flows in the Thai market," he said. "They are emerging-market turbulence, the US mid-term election in which we expect that President Donald Trump will not be able to control a majority, and the Federal Reserve's interest rate signals."
It's possible that the US central bank will keep the policy rate on hold in December and raise the rate twice next year, he said.
"If the Fed signals that the rate at 2.5% is enough, capital inflows will turn back to emerging markets," Mr Visit said.
The Fed's key rate now stands in the range of 1.75-2%.
