Investment Adventures in Emerging Markets

Update on Thailand

I have received numerous queries on the current situation in Thailand since the violence on Saturday, April 12, where 21 people were killed and over 800 injured.  We believe that this clash, the worst in 2 decades, will definitely result in political changes for the country with more political participation of the “red shirts”, who form the core of the protest movements that are considered anti-government. We are more bullish on the long-term opportunities for the Thai economy and market.

We believe the declaration of emergency rule in Bangkok, the Thai capital, will not change the situation and may even result in greater resistance. We understand that there is growing sympathy among the rank-and-file military for the red shirts, based on various reports.  The authority of Prime Minister Abhisit Vejjajiva has also certainly been harmed by the violence.  The army chief General Anupong Paochinda has said that “a house dissolution should be the answer,” and Abhisit had said that he would be willing to dissolve parliament by the end of the year.  However, that will not be acceptable to the opposition, especially since they feel he is stalling for time so that he can push more money into the rural areas and gain more support.  Indeed, there are now signs that various forces are finding opportunities for the ruling parties to bow out gracefully.   There is also news that Thailand’s Election Commission just recommended that Abhisit’s ruling Democratic Party be prosecuted for allegedly accepting illegal campaign donations.  That would go to the courts and if the verdict is guilty, it would lead to the party being dissolved and forced from office.  Such a development would lead to new elections.

Calling elections, however, will not resolve the longer-term issue, which is a societal divide between the ruling urban elite and the rural masses.  This needs to be addressed.  Otherwise, a win by parties aligned to the “red shirts” will likely lead to the “yellow shirts”, who are considered pro-government and royalist supporters, taking to the streets and vice versa.  We expect further unrest.

Tourism accounts for about 6 to 7% of Thailand’s GDP, and the country is likely to fall short of its 2010 target of attracting 15.5 million visitors.[1] While tourism’s direct impact on GDP is not significant, the indirect implications are higher as an estimated 20% of employment in Thailand is directly or indirectly linked to tourism.[2] At this time, employment remains tight in Thailand.

Continued demonstrations and political uncertainty will lead to delays in stimulus projects, affecting rural income and consumer confidence.  We believe that this could potentially reduce the country’s GDP growth rate to a range of 2 to 3%.  Thailand’s Fiscal Policy Office estimated that last weekend’s deadly clashes could cost the Thai economy $1.58 billion in lost revenue this year.  However, exports are expected to remain strong as long as the global economic recovery continues.

The importance of the King and his office cannot be underestimated since he has been the highest moral authority in the country. His status and image have been used from time to time to discourage dissent.  But recently the Thai foreign minister, Kasit Piromya, indicated that the current upheaval is “part of the process of becoming a more open and democratic society” and that society should be open to discussing the role of the monarchy.

While the current political crisis in Thailand poses big headline risks to stocks over the short term, it is not new or unexpected for the country.  Since absolute monarchy was abolished in Thailand in 1932, there have been about 20 successful and failed coups, numerous unrests, and several changes in the constitution.  We have been investing in Thailand for almost 15 years, and Thailand has been subjected to continuous macro and political turmoil over this period.  The series of political issues from the Asian crisis in 1997 to recent fears of the Thai King’s waning health late last year, have not impacted the long-term growth outlook for Thailand.  Our investment philosophy and process stresses the importance of having a long-term investment perspective, and companies are typically assessed based on a 5-year investment horizon.

Notably, investments in the financial services sector, such as banks, which focus more on the domestic market, and energy sectors are areas that we expect will thrive over the long run when the economy recovers.  Until last week, Thailand was one of the three best performing stock markets in Asia ex Japan since the start of 2010.[3] The Thai Baht and Thai credit were also doing well.  Despite numerous political uncertainties in the past, several of Thailand’s blue-chip corporations have outperformed their peers in more stable countries in the region.  Valuations of the stock market remain attractive with estimated P/E of 11.6x, P/B of 2.1x, and yield of about 3%.[4] The Thailand Stock Exchange (SET) Index fell 3.5% while the MSCI Thailand Index fell 4.3% from April 9 to 12.[5] This recent market correction is small in magnitude relative to the volatility in day-to-day emerging markets even in the absence of any news.

The Thailand Stock Exchange is closed from April 13 to 14 for the Songkran Festival, Thailand’s New Year, and offers some respite and a period of reflection for both parties. Thai politicians are known to be very flexible in their stances and it is a matter of trade-offs.  Hopefully, this provides time for leaders on both sides to negotiate and diffuse the situation on the streets.  Remaining calm allows everyone to think clearly, and these are traits required for both politicians and investors alike.

[1] Source: Tourism Authority of Thailand, as of end March 2010.

[2] Source: Thailand National Statistical Office, as of end March 2010.

[3] Source: MSCI, as of April 9, 2010.

[4] Source: Factset, as of end March 2010.

[5] Source: Factset, as of April 13, 2010.

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