The last month has been an extremely rough one for emerging markets, as a flight to quality has pushed investors into safe haven asset classes such as gold and silver. While some emerging nations such as Russia have been able to weather the storm thanks to commodity wealth, others have not been so lucky. Thanks to the recent oil spike and a general increase in the price of raw materials inflation has begun to pick up in a number of rapidly industrializing countries, forcing central bankers in key emerging markets to consider tapping on the brakes in order to prevent unrest in their respective nations.
One great example of this trend is in Thailand, where investors have begun to slowly return despite high levels of political risk. The nation has bounced back from the recent turmoil and has seen high levels of inflows, pushing the country’s currency, the baht, sharply higher. The baht is now at a seven week high against the dollar, a level that may be too high for regulators in the nation as it could choke off exports from the emerging nation. As a result, some are expecting the country to also announce capital controls in order to help cool down the flow of hot money entering from around the world. In a recent statement, the country’s central bank governor Prasarn Trairatvorakul said that the bank is prepared to take measures to limit capital controls and will enforce them when ‘appropriate‘.
Unfortunately, inflation is also intolerably high, suggesting that a rate hike is in store for the country–which could further boost the baht against the dollar. “In the past six months, headline inflation remained relatively steady due to limited passthrough from production costs to consumer prices and the oil price subsidy,” said said StanChart senior economist Usara Wilaipich. “Now, the central bank is very concerned about inflation. It needs to control inflation expectations.”
Due to this key central bank meeting and the multitude of options available to the bank’s governor, investors should look for the iShares MSCI Thailand Index Fund (THD) to remain in focus throughout Wednesday’s trading session. The fund tracks the MSCI Thailand Investable Market Index, which holds about 90 securities with heavy weightings going towards both the energy and financial sectors. Each of these sectors makes up about one-third of the fund’s total assets.
No matter what happens at this policy meeting, look for THD to be in for a volatile trading day as any news about rate hikes or capital controls could heavily influence investor expectations about Thai equities and the market as a whole. While a rate hike and greater capital controls would probably be good for the country in the long-term, over the next few days it could scare away some investors and push down THD in the short-term. Either way, look for THD to exceed its average volume of 240,000 shares by a wide margin, putting the entire Southeast Asia region into focus throughout Wednesday trading.
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Disclosure: No positions at time of writing.
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