International Investment in Thailand Recent

¶ … International Investment in Thailand

Recent developments in Greece and elsewhere in the euro periphery demonstrate that investing always incorporates risk, even in the relatively stable societies of Western Europe. Thailand, on the other hand, has seen asset prices sink in recent weeks as the political status quo frayed, but while this is a good time to review our portfolio's exposure to the country, I see no reason to make a dramatic change to existing allocation.

As of April 27, the benchmark Stock Exchange of Thailand Index (.SETI) was down 5.4% from the recent high of 808.15 touched on April 5 (SET market data). Significantly, this market peak coincides with the April 7 emergency decree that initially alerted global media and investors that the pro-Shinawatra "Red Shirt" protest movement could metastasize into broader social unrest or even civil war (Peck).

But while the political situation has encouraged tourists to flee Bangkok and the beaches, foreign capital continues to flow into the country. According to the Thai Board of Investment, $1.3 billion in new direct investment was placed in the first quarter -- a period punctuated with terror attacks and mass protests. Furthermore, veteran investors like Mark Mobius (Plessis) have noted that Thailand has survived much worse in the past and frequently endures similarly sharp market corrections due to political or economic upheavals.

While the prospect of a royal succession would be spiritually catastrophic for the Thai people, most of whom have never known another sovereign, the palace does not interfere in day-to-day politics. As such, while the heir apparent is at best an aging playboy, it would require a substantial deformation of the country's political landscape for his character to become a significant risk factor. That said, the end of the current reign would make such radical deformation possible and should not be discounted. Political risk in this often-fractious market can only increase; it is unlikely to decline over the near-term.

Despite worries about the impact of the current political unrest on tourism and other industries, the economy is one of the strongest in Asia. According to World Bank calculations, foreign exchange reserves already cover 13 months of imports and with a current account surplus in place, reserves can rise to cope with any speculative pressure on the baht. Fiscal deficits are running at 2% to 4% of GDP and government debt is at about 45% of GDP and falling (Thailand Business News).

It is likely that the air travel disruptions of April (peak European vacation season) would have had a negative impact on the Thai tourist industry whatever the domestic political situation happened to be. Nonetheless, Finance Minister Korn Chatikavanij has warned that pre-crisis forecasts will have to be scaled back by roughly 2 percentage points to reflect the impact on tourism in particular (Tarrant). However, the Thai government's guidance on growth has been conservative; if we take the World Bank's pre-crisis estimate of 6.2% (Thailand Business News) and factor in Chatikavanij's warning, Thailand's near-term growth potential comes in at a healthy 4.2%.

From a pure value perspective, Thai stocks are already trading at relatively cheap levels (Reuters). The SET is valued at roughly 12 times estimated 2010 earnings, which makes it the second-cheapest market in Asia (behind Pakistan) and significantly undervalued compared to Indonesia (14 times 2010 earnings) or Malaysia (15.7 times 2010 earnings). While it may be time to reconsider our sector weightings in order to take advantage of bargains in Bangkok (and dump stocks that are looking rich or in danger of deteriorating further as the political crisis continues), it would probably not be prudent to move money away from the market entirely.