THD: Thailand Stocks Continue To Weaken, Look For A Buying Opportunity

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Thailand stock market underperforms due to weak tourism, exports, and political instability, leading to a significant decline.The decline has seen some cheapening up of valuations, particularly ...

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E4C/E+ via Getty ImagesiShares MSCI Thailand ETF overview  The iShares MSCI Thailand ETF (NYSEARCA:THD) was launched in 2008 and tracks the MSCI Thailand IMI 25/50 Index. There are over 130 constituents, and it covers approximately 99% of the free float-adjusted market capitalization in Thailand. I first covered THD last year, noting that valuations were not very compelling. Whilst a potential rebound in tourism was a potential catalyst, the outlook for their exports was cloudy. Adding to uncertainty, was that I wrote that article just prior to their election. A lot has happened in Thailand since then, with their stock market declining significantly. The tourism rebound seen thus far has been somewhat disappointing, and likewise their weakening exports contributed to slowing economic growth. The common political instability has also plagued the nation and worried markets. Even as recently as last week, we still don’t seem to be seeing improvements in Thai politics. We saw a court ruling to dissolve the Move Forward Party, the party which the people clearly favored in the 2023 election. Nonetheless, Thai stocks took this in their stride, in what was a volatile week for markets. There may be some green shoots when it comes to the potential for a recovery in GDP leading into next year, led by tourism and exports this time around. The Thailand ETF is therefore worth another look, given a lot has changed in the last 18 months. If we can expect some decent EPS growth on the back of this, the relative valuations now may have improved. Thailand stock market significantly underperforms in 2024 When I mention the relative valuations of the Thailand stock market, in part I refer to some of their Southeast Asian neighbors. Such markets are often quite correlated, however this year we have seen some striking divergence.   Bloomberg Finance L.P., iFAST compilations. Data as of 28 July 2024. This underperformance of Thai stocks is attracting plenty of media attention, so this could appeal to contrarian investors. Over the last five years, it is had been common for Thai stocks to trade at a premium to Malaysian stocks on a P/E basis. Recently though that changed, with the P/E on Thai stocks dipping below that of Malaysia. We have also seen the P/E premium Thailand had over the Singapore market contract considerably this year.   Bloomberg The weakness in Thai stocks since the beginning of 2023 has been due to a variety of factors. Some I have already touched on, but leading the selling appears to be the negative sentiment from overseas investors. To quote from the recent article linked to above, “Over the past decade, the proportion of Thai stocks held by foreign investors has decreased by 10%, equivalent to an outflow of over 1 trillion baht. Consequently, the share of foreign investors in the Thai stock market has dropped from 37% to 27%. In the last six months alone, foreign investors have sold over 100-billion-baht worth of Thai stocks.” The article also notes how domestic investors are not as concerned over political risks. The recent price action of Thai stocks last week amidst the news of major upheaval to the Move Forward Party was a sign of this. It appeared more like a “sell the news, buy the fact”, type market reaction. Thailand ETF has underperformed other ETFs in the region over five years The charts these other Southeast Asian Equity ETFs do display some reasonable correlation over the last five years.   iShares Southeast Asia ETF peers, Seeking Alpha.   Source: Total Return 5 years to August 9th, 2024, Seeking Alpha. Since the beginning of 2023 however, a few months prior to Thailand’s election, Thai stocks stand out for the wrong reasons. Their market has established their own unique downward trend without much respite at all. From that point in time Thailand’s market is in clear bear market territory having lost more than 20%. Others like regard the iShares MSCI Malaysia ETF (NYSEARCA:EWM) and the iShares MSCI Singapore ETF (NYSEARCA:EWS) have been rising this year. I would regard both these as vulnerable now however, with their heavy weights in banking sectors where growth may be subdued. The iShares MSCI Indonesia ETF (NYSEARCA:EIDO) and the iShares MSCI Philippines ETF (NYSEARCA:EPHE) have performed better than Thailand this year, but nonetheless produced slightly negative returns. Sentiment in Indonesia has been weighed down by their own uncertainty on the back of political changes. The Philippines are recording solid GDP numbers but still struggle to attract FDI inflows compared with some of its neighbors. The ETF here is also quite small at under $100 million. iShares MSCI Thailand ETF facts and long-term performance The inception date was back in 2008, with long-term performance barely showing any positive returns if we allow for inflation.   THD factsheet June 30, 2024   THD factsheet June 30, 2024 The AUMs are shrinking from a variety of factors. These include the negative returns over the last five years, the fact it pays out regular distributions, and poor sentiment means investors have wanted to exit. Nonetheless the fund size and expense ratio are tolerable if one is optimistic about future returns.   ishares.com THD NYSE performance data  Don’t rule out Thai equities just because of the last decade It is hard to argue from the facts above though that this ETF is a buy and “set and forget” type investment for the next decade. In fact, as I write this, I can almost hear the comments section filling up pointing to the long-term performance numbers above. I would, however, like to offer some food for thought regarding this sort of thinking. Recency bias can sometimes cloud our viewpoints, leading many to conclude never to consider EM equities versus developed market equities. Timeframes are important, as is what investors view as an appropriate proxy for how developed market equities have performed. If we go back to the end of 1999 to do our comparisons, the performance of EM equities looks reasonable and the winning trade. Also, if we compare them with the MSCI World Index rather than just the US market, we conclude the same. This point was highlighted by this recent article, discussing that we should not dismiss using EM equities in one’s portfolio, nor rule out implementing this via passive ETFs. To quote from the above article, “According to FTSE Russell data, the FTSE Emerging TR index gained 355.2% between 31 December 1999 and 10 April this year versus 329.2% and 303.1% for its developed and all-world TR indices, respectively.” What this does highlight is that investing requires buying when long-term fundamental valuation signals are favorable, and that patience is required. Are Thai stocks cheap? In attempting to answer this question I shall first examine this ETF’s valuation and sector data.   THD factsheet June 30, 2024The P/E ratio and P/B ratio have cheapened up since my previous article on THD early last year. Back then the ratios were 16.3 and 2.1 respectively. (data was from Dec 31, 2022). I have mentioned the sector data in this valuation discussion because other Southeast Asian ETFs I have discussed above have circa 40-50% weights to financials. They have virtually zero exposure to technology, although admittedly the Thailand ETF has only 7% to this sector. For those that argue that the P/E ratios (that are not too dissimilar to Thailand now) of these ETFs are more attractive, we should consider sector exposures. Traditionally banks trade on lower P/Es, meaning perhaps these other Southeast Asian markets are not as cheap as they look at first glance. Another factor is to consider forward P/E ratios and any potential uplift in Thailand EPS forecasts for the next year. This is of course more art than science, but there is some reason to suggest EPS growth is on the improve. According to research from iFAST global markets, projected P/E ratios are below the “fair” P/E value range and cheap versus the past 5-year averages. This is even though iFAST are reasonably cautious on Thai equites, with a neutral view on the economy expecting a slow recovery path.   Bloomberg Finance L.P., iFAST compilations. Data as of 28 July 2024.Improved EPS prospects in the next year or two could well be reasonable forecasts. There is a lot happening in Thailand of late, some of which could provide positive catalysts to stocks. Various changes discussed in Thailand in the last year Despite all the criticism Thailand gets when it comes to politics, investors may be served well by not losing sight of the country considering various changes. Often the changes discussed have a bias to providing boosts to tourism and the economy more generally. Some changes discussed have already occurred, some are about to occur, and some are controversial. I am not making any statements here whether such moves may or may not be good ideas in a general sense. Rather they may be steps that are helpful for investors in the Thailand stock market. Examples that come to mind are the following:  Thailand’s digital wallet rollout, which has already attracted attention from stock market investors. About 50 million adults may soon take advantage of a 10,000 baht (approx. USD 285) handout. Government stock market measures discussed here. These include tax allowances for local Thai ESG fund investors, establishment of a state-controlled fund to own Thai stocks, and specific measures aimed at reducing short-selling. A major overhaul of various Thailand visa rules, as summarized in the previous link. This enables a lot of foreigners (“digital nomads”) to stay in Thailand on the new “Destination Thailand Visa” for five years. Although they would have to exit once each year for a day. For tourists, countries eligible for visa free entry went from 57 to 93, including China and India. The entry stamp has doubled from 30 to 60 days now. In 2022 Thailand became the first Asian country to decriminalize cannabis. There has been talk this year of moves to outlaw cannabis again, but it appears here to stay. The country will soon become the first Southeast Asian nation to legalize same-sex marriage. Further indication of Thailand’s bold plans to boost growth via tourism, are that they are moving closer to legalizing casinos. Thailand has also been mentioned as being one of the progressive leaders when it comes to Southeast nations potentially joining BRICS.  Risks When discussing the risk of Thai stocks, citing political instability has been a given for decades now. This is no exception now as the media discusses the fallout of Thailand’s disbanded Move Forward Party. As I mentioned earlier though, perhaps a lot of bad news was already factored in regarding this. Many were already of the view that that the disbanded Move Forward Party simply just forms a new similar party, with some new leaders with similar characteristics. The sluggish growth of Thailand’s economy over the last year though is cause for concern. Key risks are more structural, including Thailand’s weak manufacturing sector.   Thailand’s Department of Industrial Works, Reuters.The above manufacturing backdrop obviously does not look good, but stock markets are forward-looking. We are not only getting close to a rate cut from the Fed, but this may also give more scope for Thailand to now also turn to an easing monetary policy cycle. Conclusion The amount of pessimism towards the Thailand stock market is reflected by the total disinterest from foreign investors. They have been net sellers for a decade, with significant selling this year leading to further underperformance. Despite this, after the recent week of Thai politics making international headlines, their stock market was relatively calm. In a week where we witnessed Japanese stocks crashing, and plenty of talk of a US recession, Thai stocks declined by a modest 1%. If you believe stock markets ignoring negative news is a bullish sign, then maybe Thailand stocks are getting close to bottoming. I am not quite at that stage yet, as I am not convinced adding EM equities before the Fed has begun to cut rates is the right move. Equity markets struggled in the year or two following the rate cutting cycles starting in the years of 2000 and 2007.  Should we experience a further correction in stock markets including Thailand’s in the order of 10-15% from here though, I see it as a buying opportunity. This would put the P/E of Thailand's market very clearly at the cheaper end of the historical ranges. Such a correction may also likely come with the backdrop of rate cuts being delivered in the US, and later in Thailand.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2459194565"}