Up-Dated > Bloomberg & Barrons 2014 bearish analysis of Thailand, proved “On the Money”

About 2 months ago, emerging market guru, Mark Mobius and Morgan Stanley, the globe’s largest asset manager, came out very bullish on Thailand, to the point of supporting the coup. Mobius said, in fact, the coup brings law and order, where un-certainly under Yingluck hurts investments.

(Up-Dated) Most of the bullish sentiment on Thailand has evaporated, as the earlier touted Thailand’s 2014 GDP of about 3%, from political certainty Mark Mobius and Morgan Stanley were talking about, keeps getting revised downward, to currently, below 1%.

The problem is, Thailand’s problem stems from deep rooted problems that many pointed out, the coup will not be able to solve, and thus, what Mobius and Morgan Stanley were investing on, is just short-term, knee-jerk, reactions to cheap Thai investments, as the stock market was hurt by all the turmoil leading up to the coup.

With such reality, many investors concluded, that the investment opportunity in Thailand, will mostly dissipate when the cheap price is gone out of the picture. Additionally, many analyst pointed out, the weak fundamental of the Thai economy, particularly high house-hold debts, un-sustainable broad price control to stem inflation, weak competitiveness hitting exports, and the shut-off of economic stimulating populous policy. The coup junta’s deep intervention into Thailand’s economic affairs is another concern.

Bloomberg says the latest SET rally came as Prayuth, the junta leader, accelerated payments of about 92 billion baht ($2.9 billion) owed to the nation’s farmers under a rice subsidy program. The military also plans to speed up infrastructure spending, including a dual-track train project that was ruled unconstitutional by Yingluck’s administration, and projects along the nation’s borders with Malaysia, Myanmar and Laos.

Thailand’s economy, which contracted 0.6 percent in the first quarter from a year earlier as political unrest hurt consumption and halted investments, is forecast to grow 1.6 percent this year and 4 percent in 2015, according to analyst estimates compiled by Bloomberg

“We are more upbeat about the outlook of the economy and corporate earnings in the second half, with the strong recovery in public investment and domestic consumption,” Ekpawin Suntarapichard, an investment strategist at SCB Securities Co., said by phone on July 21, to Bloomberg.

Bloomberg reports, however, bulls are too optimistic about the prospect of a quick recovery in economic growth, according to Sukit Udomsirikul, the head of research at Maybank Kim Eng, the country’s biggest stock brokerage. The firm, which said on May 26 that the coup would boost the economy and stocks linked to domestic demand.

The following is from Barrons

Thailand: What Democratic Reform? Military Constitution; Expensive, Says BAML

By Shuli Ren

In the two months since the military coup on May 22, the Thailand SET Index has advanced about 10%. The Thai baht gained 1.9% against the dollar and the iShares MSCI Thailand Capped ETF (THD) rallied 12.8%.

The perception is that the military is good for the economy. Army General Prayuth Chan-ocha last week said he expected exports to grow 7.2% from a year ago in June, or about $20.5 billion, a sizable jump from the average of $18.6 billion during the first five months this year. The interim government now expects that the Thai economy can grow at least 2% this year.

Bank of America Merrill Lynch questions that 2% math:

Exports will be critical to Thailand’s GDP growth because they form 60% of GDP. While it may appear that 3-5% rise in exports should be easily achievable, it could, in fact, be a major challenge. This is because exports during the first five months of this year fell 1%, which means that a 3-5% growth in exports for all of 2014 would require that exports grow about 6-7% yoy every month from now on (or average month value at US$20.5bn) to the end of the year.

How about domestic demand? The military government is less competent than the Thai media portrays it to be, for five reasons:

The recently approved budget for FY2015 is conservative.

The ongoing and extensive personnel changes at the top of key government agencies and SoEs is expected to continue until September when the fiscal year ends. In our view, these changes will, more likely than not, lead to delays major decisions especially those related to project implementation.

The NCPO ordered the 4G auction be postponed by at least one year to 3Q15.

Many important decisions still need to be made before several infrastructure projects are shovel ready.

NCPO has set up various mechanisms such as a military-dominated budget scrutiny committee and a “super board” for SoEs tasked with a review of procurement by these agencies for all projects worth Bt100mn or more.

Separately, General Prayuth had a meeting with the king on Tuesday and received an official endorsement of an interim constitution. This constitution essentially gave the military effective control of Thai politics. “All decisions made by Gen. Prayuth will be legal, while he also has veto power over the drafting process of a permanent new constitution,” reports the Wall Street Journal. In other words, forget about democracy.

Eurasia Group‘s analyst Ambika Ahuja gave a scathing review of the interim constitution:

The 48-article interim constitution contains several clauses that give the army effective control of Thailand’s constitutional and electoral reforms. The army now has official veto power over the content of a finalized constitution before it takes effect and there will be no public referendum to approve the document.

These provisions will give the army room to include draconian measures in the final constitution to curb the power of elected politicians in the next poll. The end goal is to orient the system in such a way so as to prevent former Prime Minister Thaksin Shinawatra from sweeping back into power when elections are held again.

General Prayuth himself will also likely retain control of the temporary government either by becoming a prime minister himself or taking a position as a defense minister. Another possible scenario is his extension as army chief after his official retirement in October and the installation of former Army chief Prawit Wongsuwan as prime minister. Such a move would signify a failure to find any neutral figure to navigate the political conflict and strong distrust of those outside of the army.

Currently, MSCI Thailand trades at 13 times forward earnings, a 21.4% premium to its long-term average.

Bank of America Merrill Lynch believes Thailand has become expensive. Traditionally the Thai equities are linked to the appreciation of Thai baht, and “unless the baht appreciates more or the BoT raises money base (which is far less likely), the upside for the SET appears to be limited,” wrote analysts Supavud Saicheua and Thanomsri Fongarun-Rung. This rally also seems to be fueled by foreign portfolio capital inflows, the bank noted.

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