Investors don’t like political uncertainty. But the fact that Thailand’s former prime minister recently absconded before potentially getting a 10-year prison sentence may have been a good thing for the country’s markets.
After that late-August move came a continuing rally for Thailand’s benchmark stock index that has pushed it to four-year highs. The SET is positioned to potentially break the record set at the start of 1994.
That comes as Thailand’s currency, the baht, has risen 7.5% versus the dollar this year, to be neck-and-neck with a few other currencies as the best-performer in Asia, according to Société Générale . The currency is at its strongest level against the greenback since mid-2015.
Bonds have also kept pace with gains in other emerging markets, with the Thailand market seeing net inflows of $5.7 billion this year. In contrast, Malaysia and Indonesia, which have smaller bond markets, have seen foreign inflows of $4.3 billion and $8.7 billion, respectively.
“Anyone that has traded Thailand for any length of time is all but immune to political risk,” said Andrew Bresler, deputy head of sales trading for Asia-Pacific at Saxo.
The country, ruled by a military junta since then-Prime Minister Yingluck Shinawatra’s government was ousted in 2014, is known for its frequent coups. Elections scheduled for next year are another flashpoint for investors.
That political premium, in addition to poor corporate earnings, may have colored, start-of-year under-performance for Thai stocks. Through Aug. 11, the SET index rose just 1.2% this year. But it has closed higher in 16 of the past 19 sessions, including the past seven coming into Monday, to climb a cumulative 4.8%.
With the military frequently inserting itself into Thailand politics over the decades, the country is often viewed as a riskier bet than most stock markets. Even with the past month’s rally, the market trails double-digit gains logged this year—not just in Southeast Asia, but throughout the region—because of oil-price weakness and what had been a sluggish earnings trajectory.
But market participants say improving fundamentals could lead to sustained gains for Thai stocks, which collectively have a market capitalization that is slightly less than the markets in Indonesia and Malaysia but more than double that in the Philippines.
“Earnings-growth momentum is shifting from commodities to domestic sectors and is reducing market sensitivity to oil prices,” Société Générale said in a recent research note as the investment bank turned to overweight on Thai stocks. “In the context of attractive valuations, we believe conditions are in place for equity out-performance to resume.”
Economic data have also been robust of late, stoking confidence in the country, noted Prakash Sakpal, an Asia economist at ING. Gross domestic product rose a stronger-than-expected 3.7% in the second quarter, the Thai government’s economic-planning arm said in late August. It now sees GDP rising as much as 4% this year.
“In the absence of either tighter monetary policy out of Thailand or some sort of geopolitical event that drives all markets lower,” stocks there “will probably continue to go higher,” said Saxo’s Mr. Bresler.
Some doubt that interest-rate increases will come anytime soon. Citigroup said last week that while the Bank of Thailand is likely to raise its economic-growth projections this month, the central bank is unlikely to raise policy rates before 2019.
Many bank stocks globally have been under pressure in recent weeks, in part on concerns that the low-interest-rate environment would persist, keeping lending margins suppressed. But Thai lenders’ shares could be set to outperform as the country’s economy strengthens and credit growth stabilizes.
Thai banks’ price-to-book ratio is also one of the lowest in Asia at 1.25, said Société Générale. But after the essentially flat earnings expected for this year, 14% growth is projected for 2018. It added that banks are forecast to make up nearly half of the Thai stock market’s overall profit growth expected next year.
Despite the recent stock rally, which has the SET 6.7% below 1994’s record closing high, the market’s price-to-earnings ratio is the lowest since 2013 at 15.4. In comparison, the metric is 16.9 in Malaysia, 18.6 in Indonesia and 19.9 in the Philippines.
Thailand was among investors’ top picks last year, and the SET rose 20% then, but net stock buying—purchases minus sales—by foreigners has slowed notably in 2017 to the least in Asia at $60 million, according to Société Générale data. In contrast, foreigners have bought a net $450 million of Indonesian stocks and $2.5 billion in Malaysia.
As such, value investors—and not just the adventurous types often found in emerging and frontier markets such as Thailand—could have reason to put some fresh money there.
