Mutual funds: Articles

Author: Stuart Fieldhouse

The recent news of the military coup in Thailand is producing surprisingly positive reactions from the fund management industry.

While Southeast Asia political specialists have been shocked that the military has seen fit to intervene yet again in Thai politics, the investment community is more sanguine. There is an expectation, however, that this will hit investments in Thailand in the short term, although pundits are hoping for a swift return to normality, and potential profits from value-based investments.

Initial financial impact saw the Thai baht fall 2%, while offshore Thai stocks fell 5% (Bangkok's own stock exchange was closed due to a national holiday), and further selling is expected, particularly as big domestic investors re-position themselves to await the political outlook.

Why here, why now?

Thailand's military has not seen fit to initiate proceedings against a government for 15 years, although the country has seen 18 coups since it became a constitutional monarchy in 1932. The origin of the present coup lies in prime minister Thaksin's controversial decision in January to sell his stake in Shin Corporation, the telecoms entity, on which his fortune is based, to Temasek, the Singapore government's investment arm, making him a cool $2bn tax-free.

Not bad, but for his electorate, unconscionable, as the prime minister has long preached that strategic national assets should remain in Thai hands. Indeed, his own party, Thai Rak Thai, translates into "Thais Love Thais." That a foreign government, indeed a perceived regional rival, should be the buyer of Shin, has compounded the double standard.

The series of Bangkok street protests that followed saw the premier apparently outwit his political opponents, with a snap election called for April this year. In one of the more bizarre twists of recent months, the opposition refused to participate, allowing Thaksin to win comfortably. The election has since been annulled, with the current government in place as a caretaker administration ahead of planned polls in November. In recent days, however, the political heat was turned up: investigations over the use of nominees to 'front' Temasek's purchase of Shin Corp have sparked serious questions over the ownership of other foreign joint ventures in Thailand, including Tesco, Siam City Cement, and Cemex - all of which use similar structures to exercise control. Questions have suddenly been raised over the 2001 privatisation of oil refiner PTT, the largest stock on the Bangkok exchange. Against this, a perjury case brought by one of Thaksin's former business partners was thrown out of court.

"Thaksin is often described as divisive and a populist, with his support drawn from the rural poor," says Aberdeen Asset Management, in a briefing note issued to clients today. "But that is simplistic. The first Thai prime minister to serve out a full term and be re-elected, he also enjoys broader support for genuine reforms - his high profile crackdown on drugs, loan sharks, and the more parasitical elements of Thai society."

His reformist stance has upset a lot of vested interests, in Aberdeen's view. "Thaksin is not blameless," says the UK fund manager. "After the April election he said he would step down. He hasn't. Now, in attempting to place his own people in power within the army, he appears to have over-reached himself. The army has its own sphere of influence. The claims and counter-claims that are now being made for the public interest must be seen in this light."

Economy and market

Thailand is currently enjoying a period of economic stability, and has been recovering steadily since the 1997 Asian financial crisis. GDP growth over the first half of the year was 5.5% The current account has lately tipped into deficit, but exports have been running at record levels. The market is expected to fall initially on the basis of sharp domestic selling as soon as it opens.

"In recent months, it is true that growth has started to ebb," says Aberdeen. "Thailand is the most oil import-dependent economy in Southeast Asia, and sustained high prices have led to rising inflation. As a result, the Bank of Thailand raised interest rates 12 meetings in succession - which has made the baht the best-performing currency in the region so far this year. However, in August the governor announced 'enough is enough', and the expectation now is that growth will slow."

The stockmarket, meanwhile, has been placid for much of the year, and is down fractionally since January. This has been the case, more or less, since it doubled in 2003. But earnings have been growing reasonably and the stocks have started to seem inexpensive.

"I would not be surprised if the stock-market fell sharply initially, which could present a great opportunity to acquire quality stocks at very attractive valuations," says Robert Harvey, Associate Director for Emerging Market Equities at F&C Asset Management.

Says Aberdeen: "Our model portfolio trades at around 12.3 times 2007 earnings, with an average dividend yield of 5.9% - which is attractive on a regional basis. It is one reason why Thailand was a popular call at the outset of this year, and why foreigners have kept on buying. In light of yesterday's events, that discount may look merited, however. Yet we would caution at this point against any knee-jerk reaction. From a fundamental perspective, we like Thailand. In fact, our contrarian instinct is to look for bargains if more risk-averse investors turn tail."

Aberdeen thinks some fund investors may worry that Thailand could become less hospitable to foreigners. "We think that is unlikely," it comments. "The country needs foreign investment, particularly in light of China. This is well understood by the business community; the ambiguity of current ownership regulations underscores that investment is welcome, but on Thai terms."

Coups in Thailand have had pragmatic outcomes in the past, and are a well-tried - if archaic - mechanism for changing governments that have run their course. The role of the monarchy has been crucial here, balancing military and civil interests. The king, who has recently completed 60 years on the throne, is universally revered. In the April crisis he declined to intervene, although a palace-orchestrated solution now might indicate assent for the coup. That may in turn speed a resolution, with a respected elder statesman introduced to run a caretaker government.

"In the next few days, allegations of corruption could possibly emerge against Thaksin's government in order to justify the coup in the eyes of rural supporters and the Thai business community," says F&C's Harvey. "But the real challenge will lie in convincing foreign investors that Thailand is still a democracy and that the coup to toppled the current government was the right move. It is all over for Thaksin and Thaksinomics, and I am convinced that the outlook for the Thai market remains broadly positive. Foreign direct investment should again start to pick up, the Japanese will continue to invest in the Thai automotive and auto parts industries, and the Thai stock-market is likely to emerge stronger once the dust settles."

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