Developments overnight in Thailand: the Thai government implemented capital controls to reduce foreign speculation in the local currency and investments market. This reminds people of the July 1994 action when Thailand floated the baht and started the multi-year bear market in the Asian emerging markets. We at Riedel Research consider these events to be very different.
Note that this most recent action was an attempt to reduce foreign demand for Thai currency as a result of its recent strength. The 1997 action resulted in concerns about the stability of the economy and attacks on the currency. This time around it is a step being taken as a result of things going too well, not too badly.
The Thai action spread weakness across the Asian markets overnight and led to weakness in other emerging markets today. This is not unwarranted given that these markets are up very strongly year-to-date and this is a significant reminder of the political risk one takes investing in these emerging markets.
This time around is, however, quite different. We would be buyers of these markets in any significant weakness. Thanks in large part to strong commodity prices, the balance sheets of these countries, companies and individual citizens of these economies are very strong, much stronger than they were in the late 1990’s when they were saddled with considerable debt.
Riedel Research has been concerned about the strong rebound in Thailand since the recent military coup there. This was, we believe, an action that investors should have viewed with considerable caution. We believe it is unlikely that the military government is able to write a constitution, hold elections and step aside in their one year, self-imposed schedule. We believe there will be another correction in Thailand when foreign investors realize that the military is going to stay longer than promised.
Editor's note: US investors have exposure to Thailand via two closed-end funds: the Thai Fund (NYSE:TTF) and the Thai Capital Fund (NYSEMKT:TF-OLD). Investors can get broad exposure to emerging markets via the iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM) and the Vanguard Emerging Markets Stock VIPERs ETF (NYSEARCA:VWO).