Where’s This Thai ETF Go From Here?

Thailand – one of the largest and most populous nations in Southeast Asia -- has been a laggard this year. If slower growth, faltering consumer confidence and weak exports were not enough, political strife came into the picture casting a shadow of doubt on the resilience of the Thai economy.
 
Issues In Thai Economy
The month-long unrest to expel Prime Minister Ms Yingluck Shinawatra’s administration – built on the political structure of former Prime Minister Thaksin Shinawatra – took a violent turn on December 1 when demonstrators went on to seize police headquarters and TV stations, even causing the death of four protesters.
 
The rallies protesting an amnesty for transgressions dating back to the 2006 rebellion that expelled former premier, Thaksin Shinawatra, the brother of the current Prime Minister. As the protest flared up, it took the shape of a drive to end the sufferings under Thaksin Rule.
 
The protest is hurting the government spending and all-important Thai tourism industry. In fact, twenty-three countries issued warnings against visiting Thailand amid the turmoil.
 
Naturally, concerns are building over economic growth as well.
 
In any case, Thai growth scenario has not been inspiring of late. The growth rate witnessed its first quarter-on-quarter expansion (1.3%) this year in Q3 after falling 0.3% in Q2 and 2.2% in Q1. Year-over-year, Q3 GDP grew 2.7%, down from 2.9% in the June quarter, marred by a slump in household consumption and investment.
 
In addition, the Fed’s possible scaling back of the QE program is a nagging concern. Growth in the emerging nations like Thailand depends largely on cheap dollars, the absence of which is sure to take a toll the country’s growth profile. Notably, Thailand saw a $1 billion outflow in FII in November (read: Is the Thailand ETF in Trouble?).
 
In order to reflect a lower-than-expected, year-to-date performance, the Thai central bank slashed its 2013 growth forecast to 3% from 3.7% projected earlier, and its 2014 forecast to 4% from 4.8%.
 
Steps To Boost Economy
Amid such a backdrop, in order to restore some confidence in the nation’s financial market and trigger growth, the country’s central bank unexpectedly had slashed its one-day bond repurchase rate by 25 basis points to 2.25% against analysts’ expectations on November 27. The surprise move by the Bank of Thailand also looked to counter the recent turmoil created by civil protests.
 
Continued drop in inflation rate (presently at 1.46%) and measured household credit growth also helped the Bank of Thailand to take such a step. This is the second time this year that Thailand cut its interest rate. The Bank of Thailand has plans to go for a further cut should the protests extend.
 
The reduced interest rate spread cheers within the rate-sensitive real-estate sector and sent Thai stocks on a rally last Wednesday (November 27), with the Thai SET index rising 1% in session. The bond market also revived while the nation’s currency, the baht, fell against the U.S. dollar (see Southeast Asia ETF Investing 101).
 
Upturn Fails To Sustain
However, the applause was extremely short lived as the protest escalated in December. The performance was also felt in the ETF world. Thai ETF iShares MSCI Thailand Capped ETF (THD) – that gained 1.56% on the day of the rate cut announcement – slumped 2.43% on December 2, reflecting the heightened anti-government dispute.
 
We expect a short-term pullback in THD thanks to the recent unsettling scenario. However, a pull-back is not always bad for a product as it opens up a buying opportunity. As such, investors may want to take advantage of THD’s undervalued status and ride on its long-term prospects.
 
The fund has a positive Zacks ETF Rank of 2 or ‘Buy’ rating and could be an interesting pick for risk tolerant investors over the long haul. At the current level, the fund does not seem to satisfy the short-term investment purpose.
 
Thailand ETF In Focus
This is the only Thailand specific ETF and tracks the MSCI Thailand IMI 25/50 Index. So far, the ETF has amassed about $551.0 million in its asset base. It has an average daily volume of nearly 200,000 shares.
 
Holding 111 securities in its basket, the fund is concentrated in the top 10 holdings which account for as much as about half of the total. The ETF charges a reasonable 61 bps in annual fees.
 
Top three holdings Siam Commercial Banks, PTT Pcl and Advanced Info Service make up for about one-fifth share of the fund. The fund is heavily exposed to financials that make up for 35% of the share in the basket followed by the energy and material sectors.
 
Though the fund provides exposure to all caps, it puts more focus on large caps at 77%. The fund has a nice blend of growth and value stocks. THD advanced 7.14% in the last three-month period (as of December 2).
 
Bottom Line
Investors might be in two minds over Thailand as the country is encased with possibilities and perils. This ETF could be a good choice for investors looking for a comeback in the Thai economy at a relatively low cost.
 
The fund is now trading a little higher than its 52-week lows. Economic indicators are as such on a revival mode and better than many of its Southeast Asian neighbors.
 
That said, we would like to caution investors that Thailand might struggle in the near term if the political tension shoots up further. Also, the fund will be in jeopardy if a taper threat comes in view.
 
Till then, risk-averse investors can opt for a wait-and-see approach and enter the Thai market – only if the agitation in the market cools off – as protests are likely to stifle the nation’s short-term outlook, but not necessarily its long-term potential (read: Time to Panic About Emerging Markets?).

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