Investors price in short-term Thai turbulence, do not see long weakness

Vidya Ranganathan
Monday, 2 Dec 2013 | 3:07 AM ET

SINGAPORE, Dec 2 (Reuters) - Thailand's currency and stock market have been battered by the month-long anti-government protests in the country's capital, but investors are still pricing in short-term turbulence rather than a long-drawn political and economic crisis.

The baht has weakened 3 percent against the dollar since early November while the benchmark Thai stock index is down 6 percent in the past month.

There have been some outflows of foreign money from Thai markets since the protests aimed at toppling the government of Prime Minister Yingluck Shinawatra began in early November. And yet only $1.5 billion of the total $4.8 billion that foreigners pulled out of Thai stocks this year has left since November. Outflows from the bond market have been more modest.

"People aren't selling Thai assets that much," said Mirza Baig, head of currency and rates research at BNP Paribas in Singapore.

"Therefore, there hasn't been a large portfolio outflow from Thailand. There has been currency hedging, and that's typically what investors do when they are concerned about the short term effect on markets," Baig said.

The Bank of Thailand was suspected of having intervened in the currency market to stabilise the baht as it hit 12-week lows on Monday. The currency however recovered some ground after Yingluck vowed not to use force against the protesters.

The stock market was down 0.5 percent, clawing back from a fall of 1.1 percent.

Expectations of volatility in the currency have risen, with implied one-month volatility hitting 6 percent, still short of the 6.5 percent hit during the May-September selloff in Asia this year, sparked by fears of tightening U.S. monetary policy.

Thai markets have clearly underperformed their peers in the past four weeks, making them weaker than those in Asia deemed the most vulnerable to capital flight when the Federal Reserve ends five years of easy money policy.

And yet, China's stock markets have fared worse than Thailand on a year-to-date comparison. India's rupee and Indonesia's rupiah are still nursing double-digit percentage losses against the dollar this year, against the baht's 4.8 percent decline.

Foreign investment in Thai bonds is still a net positive for 2013, despite $1.6 billion of selling in four weeks.

And the outflows have been a fraction of the $11.6 billion foreign portfolio flows Thailand received last year.

"What's not in the price is the possibility that this drags on into a very growth-debilitating medium-term standoff," said Baig.


Analysts reckon the reason most investors are staying put is because they are prepared for short bursts of political instability in a country that has witnessed numerous coups and several constitutional changes in the past few decades.

"The uncertainty discount is already in the price," said HSBC equity strategist Devendra Joshi. The Thai stock market was already the cheapest in Southeast Asia, based on a 12-month forward price-earnings ratio of 11.2, he said. "But the events in the past week make you worry about how much that discount should be."

Thailand tends to reward investors handsomely during periods of political stability. Morgan Stanley strategist Hozefa Topiwalla estimates the MSCI Thailand index has delivered an annualized absolute return of 25.9 percent during periods of stability, and an absolute negative 1.2 percent during periods of political instability.

Also, the correlations between the economy and the markets tend to be stronger than that between politics and markets. For instance, the stock market barely moved during protests between March and May 2010 that killed more than 90 people. The economy was in an upswing at the time.

But the stock market fell 55 percent between May and December 2008 during a period of violent street protests that culminated in protesters seizing the Bangkok airport, disrupting both tourism and movement of goods. At the time, there was a global recession and later, the financial crisis after the collapse of Lehman Brothers battered markets worldwide.

Nonetheless, investors are buying protection. Even the Bank of Thailand cut policy rates last week, ostensibly to pre-empt any damage to the economy and bond market.

"We think weakness in the baht is short term and we will still keep cash assets here," said Panya Chutisiriwong, vice president at the investor relations department of Thai low-cost carrier Nok Air. "Our revenue is in baht but we have 60 percent of costs in dollar and we've hedged some, about 30 percent."

Thai credit default swaps have spiked as investors hedge sovereign risk. Offshore investors are paying as much as 7 percent to hedge their one-month currency risk, about 5 percentage points more than the price onshore.

Some investors prefer to sit it out, staying away as long as there is uncertainty.

"From equity perspective, we are underweight Thai equities and prefer other opportunities in ASEAN which investors could rotate into," HSBC's Joshi said, pointing to Indonesia and the Philippines as good picks.

(Additional reporting by Manunphattr Dhanananphorn in Bangkok; Editing by Raju Gopalakrishnan)