Thailand is a highly successful “Asian Tiger” with a well-developed infrastructure and pro-investment policies. But political tension had slowed foreign direct investment and portfolio flows, although each had begun to strongly recover in 2010 and have recently accelerated after the end of the “Red Shirt” protests.
There was much confusion in the emerging market community when the Thai army was dispersing Red Shirt protesters in Bangkok last spring, but as usual Warren Buffett’s favorite “buy when there is blood on the streets” worked to a T. Thai stocks surged following the end of the protests and haven’t yet looked back.
The protesters were supporters of the ousted Prime Minister Thaksin Shinawatra. Rumor is that the Thai king had become worried with the former prime minister’s growing powers and so he ousted the highly successful and accomplished politician. Given the popularity of Thaksin, political tensions have been high since.
But none the less, foreign investors have figured out that Thai stocks and bonds have potential and need to play catch-up after their relative underperformance. In the process, they have begun to put upward pressure on the currency — the Thai baht.
It is ironic that in 2010 Thailand has been forced to put tax curbs in place to help slow the appreciation of the Thai baht, because it was the baht itself that started the domino effect that culminated in what is now known as the Asian Crisis of 1997.
Thailand just removed a 15% tax exemption for foreigners on income from domestic bonds. Other countries that have similar measures are South Korea and Brazil as they aim to curb currency gains that threaten exports. Emerging economies want to slow inflows into the debt markets because the low interest rates in the Western world allow for a lot of easy carry trades (borrowing Fed funds at 0.25% to buy higher-yielding currencies and bonds from emerging markets). So far this year, the baht has advanced 10.9% versus the dollar, the best performance in Asia after Japan.
Now, if I tell you that the iShares MSCI Thailand (NYSE: THD) is up 211% since its March 2009 lows, while the two closed-end funds — the Thai Fund (NYSE: TTF) and the Thai Capital Fund (AMEX: TF) — are up 175% and 162%, respectively, you probably won’t be terribly anxious to buy either. But these huge gains are just recovering their losses from the 2008 global recession and I think they have much more potential ahead of them.
I am of the opinion that some Asian markets may never again reach such depressed valuations as they did in early 2009.
Other than these three funds, Thailand is not very accessible to U.S.-based investors. Thailand has no listed ADRs, although there are some unlisted companies that trade OTC. This is one of the few markets that never fully recovered from the Asian crisis, even though the economy has grown notably since — and I view this as an opportunity.
The Thai SET Index traded as high as 1800 in 1997 and now is right around 1000.
But volumes have been steadily rising in the Thai market and any resolution to the political tensions would give a further boost to the economy. Overall, Thailand is a good market for buy-and-hold investors, and I think that a good move is to add to positions on any weakness there.
In addition, I give high marks to the Thai government as the unemployment rate in the country is only 1.6%. While some of those people don’t make very much money, at least they have jobs; uncomfortable comparisons with the U.S. come to mind.
From the two closed-ends funds that have similar performance, the Thai Capital Fund has a slightly bigger discount to NAV, but it is much smaller in assets — $56 million vs. TTF’s $244 million. The portfolios have actually quite different holdings, despite the similar price performances. If liquidity is an issue, I would go with the iShares MSCI Thailand or the closed-end fund Thai Fund. You can read more on the holdings here.