Thailand shows growth but lacks exciting opportunities


The constitutional reforms in 2016 helped the Thai economy reignite its growth engine on the back of global trade.

Its agriculture sector bottomed-out as the impact from the El Nino faded away and factories started chugging along to meet the higher aggregate demand on domestic and global front.

Together with its robust tourism activities, Thailand recorded a 4.6% growth in gross domestic product (GDP) for the second quarter (2Q) of 2018, slightly above consensus’ view of 4.4% growth but lower than previous quarter’s 4.8% expansion.

Last year, consensus were for elections to be held no later than November this year after King Maha Vajiralongkorn endorsed the new 2017 Constitution of Thailand back in April 2017.

But progress has been slow, which means the military will reign over the political scene for an extended period of time.

The delay is attributable to the drafting and approval of the 10 organic laws. Should the royal endorsement progress as scheduled, the current-ruling Junta is expected to ease ban on political activity in the next four months to allow political parties to undertake administrative tasks in preparation for the election.

We foresee more delays ahead despite the election timeline making notable progress.

This is due to the fact the coronation of King Vajiralong-korn has yet been set and general election will not take place till then.

The ceremony is supposed to be held after the end of mourning period last year, but the local authorities have yet to receive any instructions from the Royal house.

A delayed general election could imply more variables for the political parties, but the economy may derive little impact, in our view.

The military government has been addressing critical issues that often trouble Thai- land’s economy such as preventing flood by building more reservoir and dams, combating drought through water rationing projects, improved disbursement of budgets on infrastructure developments, implementing tourist-friendly measures and more importantly, providing political stability.

The Bank of Thailand (BoT) last cut the benchmark interest down to 1.5% in April 2015 to combat a slowdown in economic growth amid political uncertainty and downturn in commodity prices.

The environment has steered core inflation towards a stubbornly low level — below 1% since then.

The recent US Federal Reserve (Fed) rate hikes have finally brought the spread between Fed rates and BoT rates to positive territory, a level not seen since 2007.

This may be one of the main reasons behind the recent depreciation of the baht. There are increasing expectations the BoT will raise interest rates but we think the central bank is likely to keep rates on hold for the rest of the year as domestic core inflation remains benign.

A weaker baht is also a plus for its exports, as it could help cushion some residual impacts from ongoing trade tensions between US and China.

Thailand’s consumer price index figure has been creeping upwards steadily after bottoming in March 2015.

If history is any guide, core inflation is likely to trend higher over the next two to three quarters as energy cost trickles down towards the economy.

This, along with the increasing spread between Fed rates and BoT rates, should give sufficient reasons for the BoT to raise rates against a robust domestic economy backdrop.

From a stock market perspective, the valuation of the SET Index’s contracted down to 14.7x its price earning multiple at one point, before rebounding back towards level above 15x.

Have we “missed” the boat? The upside we are looking at would be around 4% assuming the SET Index is expected to revert back to a five-year historical average level of 15.3x, which it did.

At this juncture, Thai equities are expected to deliver 3.4% total return by end-2019 with earnings growth expected to drive most of the returns.

Valuations for Thai equities aren’t appealing compared to those of its North-Asia counterparts, namely China.

While earnings figures lacked encouraging momentum, we believe market participants have priced in a political stability premium for the market, which leaves Thai equities at a relatively unattractive level.

From a macroeconomic perspective, we are holding onto our positive views on Thailand due to sturdy external demand and tourism activities as well as government expenditure on infrastructure projects.