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By Martin Hutchinson
Like all investors, those making emerging-market forays need to diversify their holdings.
But that's not always easy. While each overseas market has its own particular risks, most also share in the general risks of the world economic cycle. They can easily succumb to Wall Street's periodic euphoric frenzies – as well as the panic-induced sell-offs that inevitably follow.
Sometimes a market can get untracked for a considerable period because of political problems, yet have an underlying strength that makes it a great place to invest when the problems have been solved.
Thailand is just such a market.
The Take on Thailand
The only country in Southeast Asia not to be colonized by Europeans, Thailand became a constitutional monarchy after World War II and enjoyed rapid growth from the 1960s through to 1997. During that period, the economy was liberalized and operated on a free market basis – among the freest in Asia.
However, that growth was largely concentrated in Bangkok, the capital, and in resort areas, and led to a real estate boom fueled by dollar borrowing. When the "Asian Contagion," financial crisis occurred in 1997, the Thai baht was halved and put all the big dollar borrowers out of business, particularly those who had speculated heavily in Bangkok real estate.
In the 1997-98 time period, it was expected that the Thai economy would take a long time to recover, perhaps a decade or more. In that, it proved much more resilient than most anyone expected.
Then, in December 2000, telecom billionaire Thaksin Shinawatra was elected prime minister, primarily with rural support. He was carried into office on a program that maintained the free-market system, but that spread economic growth into the nation's countryside – rather than concentrating it only in the Bangkok capital and in the resorts.
Thaksin proved himself an effective prime minister; after a mild recession in 2000-2001, the Thai economy began again to grow at around 6% per annum, or more than 5% per capita, with growth now being spread throughout the country. Thaksin was re-elected in 2005, in an election the opposition Democrat party did not contest. Then, in September 2006, after riots in Bangkok, the army staged a coup, with the backing of King Bhumibol Adulyadej and the Democrats.
The King and … Moe, Larry and Curly
In spite of being led by a former governor of the Bank of Thailand, the post-coup government possessed some of the characteristics of the Three Stooges – and was about as effective
Back in November 2006, for instance, it banned foreign investment – then reversed the ban within 24 hours. Then, in 2007, economic growth slowed to about 4%, and investment dropped 27%, having been spooked by the lack of democracy and the new government's perceived incompetence.
In December 2007, the coup managers held another election, as they had promised. Even though Thaksin was in exile, and his Thai Rak Thai Party banned, the People Power Party led by Thaksin-ally Samak Sundaravej came close to victory.
After considerable negotiation, the People Power Party formed a majority coalition of every party but the Democrats. The new government took office on Jan. 21, and has promised a return to Thaksin's successful free market policies.
The Thai stock market withstood all this unrest pretty well, but needless to say it didn't participate in the great Asian market run-up of 2007, and is now only about 5% above where it was trading in August 2006, just before the military coup.
Two Profit Plays for a Bargain Market
What's more, Thailand's SET Index is trading at a Price/Earnings multiple of about 11 – well below just about every other decent market in the world, save for South Korea. [For a Money Morning special investing report, "Why South Korea is set to Become the Biggest Economic Story of 2008," please click here. The report is free of charge].
The Economist expects the Thai economy to grow by 4.8% in 2008, but with the political situation settled, that projection could actually be a bit on the low side. In any case, inflation is only 3%. Another nice plus is that government spending is only 21% of gross domestic product (GDP), which means that the private sector has lots of room to grow.
There are no Thai stocks with a full ADR listing [and only a few on the Pink Sheets], so the best way to buy Thailand is though one of the two closed-end funds specializing in the country. There's the Thai Fund Inc. (TTF), advised by Morgan Stanley (MS), and the Thai Capital Fund Inc. (TF)
TTF is trading at a nice 10% discount to its net asset value (NAV), which is often an advantage when buying closed end funds. Its disadvantage is a relatively high 1.7% annual expense ratio, but that seems reasonable for a fairly small fund [$200 million asset value] that's invested in an exotic market.
TF, advised by the Japanese broker Daiwa Securities Group Inc., is smaller – only $42 million in asset value, with a smaller discount of only 6%, and a higher annual expense ratio of 2.1%. On the whole, I'd therefore recommend TTF, but you could always diversify by buying both funds.
If Thailand does well and remains stable, it's likely that exchange-traded funds (ETFs) for this market will be established, and that some Thai companies will do full ADR issues.
We'll keep you posted.
News and Related Story Links:
- The Asia Sentinel:
The Coup and the Palace Endgame
- Money Morning News Analysis:
Asian Index Gains Are Early Signs of Global Decoupling
- Money Morning Special Investment Research Report:
Why South Korea is set to Become the Biggest Economic Story of 2008
- Official Website:
The Three Stooges