Kiatnakin Phatra Public Company Limited (SET: KKP) has outlined urgent approaches to resolve the crisis in the Thai stock market, while pointing to the problem of declining market liquidity and its impact
Five urgent recommendations to revitalize the Thai stock market are proposed:
- Accelerate measures to promote liquidity to establish the Thai capital market as a Financial Hub
- Liquidity is a primary factor for investment and a significant requirement for both domestic and international institutional investors
- Declining liquidity leads to a Liquidity Discount and suppresses the valuation of the market
- Attract Passive Flow funds from overseas, such as MSCI and FTSE, back into the country
- Study and expedite measures to increase the weighting of Thai stocks in the MSCI and FTSE indices
- Passive Flow funds can compensate for the continuous outflow of Active Flow funds
- Focus on improving market efficiency
- Distribute liquidity beyond the SET100 to increase investment options for Passive Funds
- Avoid intervention in market mechanisms and price discovery
- Promote domestic financial transactions and investment (Onshore Market)
- Reduce regulatory gaps and lower the cost of onshore transactions to attract them back to the country
- Ensure transparency and ease of supervision
- Study and implement measures to promote liquidity in developed and highly liquid foreign capital markets
- Provide incentives to Market Makers and Liquidity Providers
- Reduce the Bid-Ask Spread, with some countries trading in fractions of a decimal point
KKPS points out that market liquidity significantly affects the valuation of the SET Index. Turnover Ratio is an indicator of market liquidity. Historical data over 25 years shows that periods of high Turnover are often accompanied by high Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios.
The declining liquidity of the Thai stock market has become an obstacle to its development as a Financial Hub. Currently, Thailand’s share of ASEAN market liquidity decreased significantly by 37% between 2019 and 2024, while Vietnam’s liquidity grew by 400% during the same period, the highest in ASEAN. KKP raises concern that investor confidence will not return if the market lacks good liquidity, underlined by declining foreign investors percentage of freefloat-adjusted market cap from 54% in 2014 to 37% in 2023.
More importantly, the MSCI Thailand index has been continuously reduced in weight. Over the past seven years, more than USD 2.59 billion (over THB 90 billion) of Passive Funds following the MSCI index have flowed out of Thailand. This outflow is partly due to declining liquidity, resulting in the lowest weighting and number of Thai stocks in the MSCI index in 8 years
KKP notes that short selling transactions directly affect MSCI scores, stating that markets that permit short selling and have efficient Securities Borrowing and Lending (SBL) increase their Market Infrastructure score. However, short selling accounts for only 4% of daily trading value, while it has an impact on MSCI scores and the consideration for increasing the weighting of Thai stocks.
