On May 22, Thailand's military launched its 12th coup after a failed attempt to get the caretaker government and the opposition to resolve a seven-month political stalemate.1 While the military has seized temporary control, we believe the coup will have limited economic and investment impact.
Business as usual
Coups in Thailand are not uncommon - on average, Thailand has had a coup attempt every three years since 1932.2 In fact, coups launched by the politically-neutral military have proved necessary to avoid violent confrontations among different political factions. Despite all the political upheaval, Thailand has always found resolutions for its problems.
For the locals, these political issues are the norm. Although the coup could affect Thailand's international branding, we believe that military intervention may be necessary to break the political impasse between two factions. In effect, Thailand has had a virtually non-functional government for the past six months. Election of a new government is expected in a year.
Intact fundamentals can withstand external pressures
Because Thailand's fundamentals remain healthy with a current account in surplus, ample foreign exchange reserves and healthy public debt to gross domestic product ratios, we believe the country can withstand short-term external pressures. Specifically, we anticipate:
- Continued disbursement of expenditures by the new government.
- A smooth transition into approving the next fiscal year's budget.
- A manageable overall impact on corporations. Historically, interim military administrations haven't had a draconian effect on businesses over an extended period of time.
We cannot, however, rule out the possibility of an adverse impact on foreign direct investments, as international leaders express concern over the military coup.
Markets unfazed over the long term
The impact of the coups on equity performance has historically proved to be short-lived, and no coup has led to an economic or financial crisis. Despite the lingering political uncertainties from time to time, the Thai equity market has delivered an impressive 25% annual return over the past five years.3
During the current coup, the market has remained unfazed since former Prime Minister Yingluck Shinawatra was ousted from the office by court verdict - the MSCI Thailand Index slipped a slight 1.1% in U.S. dollar terms between May 7 and May 22, 2014.4 In the near term, we expect that stocks in sectors related to tourism, government tariffs and infrastructure will be vulnerable to volatility. On the other hand, sectors not closely related to politics - such as banks, telecommunications and mass market consumer segments - are less likely to be severely affected by the recent developments, in our view.
Opportunity for long-term investors
It's important that investors not react impulsively to these ongoing political uncertainties and focus instead on individual company opportunities. It is, after all, unfair and inaccurate to label all Thai stocks unworthy of investment because of politics. On the contrary, Thailand has a wide selection of companies that have intact growth profiles and benefit from robust domestic demand.
Thai fundamentals still warrant commitment to a long-term investment approach. Any short-term market weakness can present buying opportunities for long-term investors.
1 Source: Bloomberg news, 23 May 2014
2 Source: Nomura research, 23 May 2014
3 Sources: Invesco, Morningstar. MSCI Thailand Index performance in USD terms, 5 years ending 30 April 2014. Past performance is not a guarantee of future results.
4 Sources: Invesco, Bloomberg. The performance is from MSCI Thailand index in USD terms. Past performance is not a guarantee of future results.
The MSCI Thailand Index is designed to measure the performance of the large- and mid-cap segments of the Thailand market. With 28 constituents, the index covers about 85% of the Thailand equity universe.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers from Thailand are expected to be closely tied to conditions within that region, and to be more volatile than more geographically diversified investments.
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