Investor sentiment strong enough to survive Thai rate hike

The widely expected tightening in monetary policy confirms the optimism about domestic growth, although analysts warn that Thailand has lost a key catalyst for continued outperformance.
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Sentiment towards Thailand remains positive despite downside risks
<div style="text-align: left;"> Sentiment towards Thailand remains positive despite downside risks </div>

Thailand has been a talking point among equity investors lately as an air of political stability has settled over the country since the July 3 elections, which passed without violence. This has added further support to the local stock market, which as of last night was the third best performing market in Asia this year after the Philippines and Indonesia, and among the rare few markets globally that are still in positive territory.

It has also boosted demand for primary market deals as international investors are looking for ways to increase their exposure to this market, and existing shareholders have taken advantage by monetising part, or all, of their existing shareholdings. In July, AIA sold $106 million worth of shares in 7-Eleven franchise holder CP All. And last week, the Thailand Equity Fund divested its entire $120 million stake in commercial property developer Central Pattana, while a Temasek-controlled entity offloaded $305 million of stock in Shin Corp, a holding company with assets in the telecom and satellite industries. All three deals were upsized, confirming the robust investor interest.

“The perception of Thailand has changed dramatically in terms of risk appetite and I’m anticipating more deals in this market,” one equity capital markets banker said last week.

“There is a market window in Thailand (for deals) right now,” added another. “Unfortunately (for banks and investors) there aren’t that many opportunities, but we could see a few more sell-down situations in the near term.”

A key supporting factor is that domestic Thai investors are keen to get involved in certain sectors again, which is seen to reduce the downside risk — even when it comes to fairly illiquid stocks. Block trades that tend to come at significant discounts to the market price are also a favoured means for international investors to gain access to domestically traded stocks.

The fact that the political discussion has moved off the streets and refocused on economic fundamentals is clearly a driving force, but the enthusiasm is also underpinned by healthy economic growth — particularly in the context of the struggling markets in Europe and the US.

In yet another nod to the strength of the domestic economy, Thailand’s central bank yesterday raised its key interest rate, the one-day repo rate, by 25 basis points to 3.5%. This was the ninth time the Bank of Thailand tightened borrowing costs since the beginning of July 2010 and the decision was in line with expectations — a Bloomberg survey had 16 of 20 forecasters predicting a hike. But in light of the potential impact on Thai exports from a stumbling recovery in the US and the European debt crisis, it seems this was its toughest decision yet.

According to a press release, the members of the Monetary Policy Committee (MPC) voted 5-2 for a hike, while its earlier decisions have been unanimous. Economists took this as a signal that the central bank is nearing the end of the tightening cycle, although immediately following yesterday’s move they were split on whether there would be one more move this year or not.

To be sure, growth momentum has slowed, as noted in the second quarter GDP data, which showed a 0.2% decline from the previous quarter, compared to 2% quarter-on-quarter growth three months earlier. While that decline was partly caused by temporary supply disruptions related to the Japanese earthquake, the government has revised down its full year GDP forecast to 3.5% to 4% from 4.5% previously.

However, the central bank is still concerned about rising inflation expectations, which it attributes partly to solid domestic demand, partly to the various spending measures announced by Yingluck Shinawatra’s new government. Because of the dire financial situation globally, these measures are now being dubbed as “fiscal stimulus”. For now, these concerns are overriding the risks of a potential hiccup in growth, which explains the rate hike.

The central bank said the global slowdown will partially weigh on Thai exports, but argued that the impact will be mitigated due to “expanding intra-regional trade in tandem with continued growth of domestic demand in Asian economies as well as export diversification to new markets”. Importantly, it also noted that “domestic consumption and investment are expected to expand due to favourable employment conditions, improved confidence, robust growth in credit demand and fiscal stimulus”.

In a research note following yesterday’s rate decision, Citi economist Jun Trinidad argued that “as supply disruptions fades, manufacturing will respond favourably to these demand catalysts”.

The spending measures, which were outlined by newly elected Prime Minister Yingluck in parliament earlier this week include plans to raise the minimum wage, boost civil servant salaries and increase rice prices.

The benchmark SET index dropped 1% following the rate hike yesterday, which took it almost back to its August 9 lows. However, the stock market has held up well amid the collapse in global markets in recent weeks and is still up 1.3% on the year. The Philippines and Indonesia are both up 3.9%. Notably, Central Pattana has also risen 7.7% since the block trade on August 16, which ought to further increase the confidence — and appetite — of investors. Shin Corp has fallen 9.4% since Temasek’s sell-down, but remains above the placement price (the deal was priced at a 10% discount given the small free-float and the illiquid nature of the stock).

Clearly, Thailand will not be the most active ECM market in Southeast Asia this year, even if the expectations of more block trades are realised. But with $1.4 billion worth of deals so far this year, according to Dealogic, issuance activity could match the $2.4 billion in 2010. By this time last year, total issuance volume was only $299 million so the current trend does look promising.

That said, a note of caution was issued by Credit Suisse on Tuesday. The bank argued that the strong relative performance — Thailand has outperformed the region by 19% since the day before the July 3 elections and by 66% since March 2009 — has eliminated the Thai equity market’s longstanding discount to its peers.

As a result, valuations are now “less appealing”, according to Credit Suisse analysts Dan Fineman and Siriporn Sothikul. After trading at a price-to-earnings discount to the rest of non-Japan Asia since 2004, Thailand is now at a 5% premium and the price-to-book premium has widened to as much as 36%, which means the market has lost a big catalyst.

“Anecdotal evidence indicates that foreign money could give one more boost, but beyond that outperformance looks unlikely,” they said. The Thai analysts, who like Thai property the best, say they are still neutral on the market, although Credit Suisse’s regional strategist downgraded Thailand to underweight three weeks ago.

Fineman and Siriporn Sothikul expect the domestic environment to remain positive this year, but say that headwinds will reappear in 2012. Risks include the issue of potential amnesty for Prime Minister Shinawatra’s brother, Thaksin Shinawatra, who was ousted in a coup in 2006, and a slow-down in corporate earnings growth to 9% from 23% this year.

“Conversations we have had with investors indicate that sentiment remains positive towards Thailand, and we have spoken with several investors looking to put money in the market for the first time. Given current valuations, however, we do not expect buying momentum to deliver more than another 5% outperformance,” they said in the report.

“We suspect that some of the money entering Thailand is from funds without Thailand in their benchmarks taking non-index positions. This money could prove flighty.”

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