Thai value amongst political turbulence

As more and more foreign investors are drawn to Asia’s emerging markets, which are leading the global recovery, one of the standout countries in terms of attractive valuations and strong fundamentals had undoubtedly been Thailand.

However the political situation in the country has been uncertain since Prime Minister Thaksin Shinawatra was ousted from office in a military coup in September 2006, and things took a turn for the worse when pro-Thaksin red-shirts launched new protests aimed at bringing the government down in March, a situation which has yet to be fully resolved. Despite the daily blood being shed on the streets of Bangkok, frequent fatalities and reports of children being used as human shields, the country, surprisingly, continues to look attractive in terms of investment potential.

Says Pinakin Patel, vice-president within JPMorgan Asset Management’s Far East and Japan equity product group: “Given the crisis, which in essence started around March when the government seized Thaskin’s assets, you can say that we are two months into this and the market continues to be positive.”

Mr Patel explains that data from the end of April indicates strong earnings per share growth, attractive yields, and strong returns on equity if compared to the MSCI Asia ex Japan Index. “However you cut it, on a valuation basis, Thailand looks attractive when compared to the rest of the region.”

Political turmoil has always been an issue in Thailand, says Mr Patel. “On average the country has seen a coup every four years over the last 40 years or so. So investors have often viewed periods of dislocation in Thailand as a buying opportunity.”

March saw $1.3bn (€1.5bn) flow into the country from foreign investors, he adds, with the Thai stock market, the SET, actually performing reasonably well. “In April MSCI Thailand was down 3.3 per cent in dollar terms, admittedly one of the worst performers in the region, but not to the extent that you might expect,” adds Mr Patel.

But just because prices have not fallen off a cliff does not mean that now is a good time for investors to enter the country, says Vincent Lagger, fund manager of the Julius Baer Asia Fund at Swiss & Global Asset Management.

He explains that valuations are not at the cheapest the market has seen in recent years when compared to the rest of the region. “I therefore don’t think that now is the right time to enter the market, especially as it does not seem to have corrected itself as much as one could have expected with all this turmoil going on.”

Mr Lagger believes expectations for Asia’s emerging markets have been ramped up massively since October last year as part of the cyclical global recovery. Having looked at China, India, Indonesia and Taiwan, there is a tendency to look around for the next countries on the list.

“Investors realised things were recovering quickly in Thailand too, not much politically was happening, the government could work on some fiscal stimulus, and so accordingly consumer confidence improved, investment intentions of corporates picked up, and bank lending picked up,” he adds.

All this together made analysts a lot more confident and it translated into a massive inflow of foreign capital. Given the current political situation, everything points to a waiting position. “It does not, to me, make a very appealing case for entering now, rather you could say there are some nice arguments to get out. There are more compelling cases for investment in the region in terms of risk-return expectations. It is very difficult to invest if you have to price in politics on top of everything else,” says Mr Lagger.

The other main Asean markets are remarkably stable, says Jonathan Bell, senior investment manager at Pictet Asset Management, while the political turmoil in Thailand over the last five years has stifled the country’s growth. “Malaysia, while not a cheap market, is showing strong GDP growth and an appreciating currency. The Philippines just had a relatively smooth election. Indonesia would be the biggest competitor for foreign portfolio and direct capital flows,” believes Mr Bell.

“The danger for Thailand is that its neighbours are improving in terms of stability and investors are willing to reward stable, secular growth stories in emerging markets.”