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Why Thailand shares are shaking off the coup

Anywhere but Thailand, a military coup combined with an economic contraction might have spurred a stock selloff, but shares there have surprised many analysts with their resilience.

"I'm shocked to see how resilient that market has been," Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, said, adding he has a slightly overweight position on the country.

Thailand's SET index is up around 0.6 percent midday Friday, topping its pre-coup levels and clocking up a more than 15 percent gain so far this year.

Read More Why Thailand's latest coup is different this time

Joan Manuel Baliellas | AFP | Getty Images

"You've got the geographical sweet spot of being in the Mekong region. You've got a very vibrant manufacturing sector. Global growth is doing better and Thailand is plugged into that in terms of its global export cycle," Sharma said. "But just the fact that the politics has been such a mess is something which has been a big negative."

After more than six months of political protests and two days of martial law, Thailand's army chief General Prayuth Chan-ocha declared the military had seized power in a coup last week. The elected prime minister, Yingluck Shinawatra, was removed from her role at the top of a caretaker government earlier this month.

Others also are looking on the sunny side of Thailand's political turmoil.

Read More Thailand's crisis: What you need to know

"During this period, we expect some ongoing short-term market volatility but we would not expect much disruption in existing company operations," Mark Mobius, executive chairman for emerging markets at Franklin Templeton, said in a blog posting Wednesday.

"The positive drivers of long-term growth for Thailand remain in place, including a very competitive business sector and Japanese investment, as well as the potential for growth from the increasing integration of Thailand's regions and the neighboring markets of Myanmar (also known as Burma), Cambodia and Laos into the global economic system," Mobius said.

Read More Coup may bring relief to corporate Thailand

Sharma also expects Thailand's status as a regional manufacturing center provides support.

"Manufacturing as a share of GDP is the second highest in the world at about 20 percent," Sharma noted. "That's the reason why that economic engine keeps humming even though the growth rates have fallen a lot."

In the first quarter, gross domestic product (GDP) contracted 2.1 percent from the previous quarter, worse than the 1.6 percent contraction forecast in a Reuters poll. Consumer spending also contracted for the past two quarters, the first time that's happened since the 1997 Asian financial crisis.

Mobius believes Thailand's long-term economic trends, including rising per capita income, will reassert themselves.

"Thailand has a large middle class and a growing consumer population, which we believe bodes well," Mobius said.

Hopes that the junta will deliver some economic goodies are also supporting the market.

"A lot of these investment projects in Thailand, which were such a big part of Yingluck's plan, were stuck because of the political paralysis over the last year or so," Sharma noted. "Many of these projects are being put on the accelerator now by the government there to get economic growth going again."

Read More Thailand's growth outlook goes under the knife

To be sure, foreign investors appear fairly unconvinced of the market's merits.

So far this year, foreign investors in Thailand mutual fund and exchange traded funds (ETFs) have pulled out around $1.11 billion, according to data from Jefferies. In 2013, foreign investors pulled around 194 billion baht, or $6 billion, from Thai shares, reversing the inflows from the previous four years.

The market's support is mainly coming from local institutional and retail investors, who have bought a net of around 32.08 billion baht (around $980 million) so far this month.

Read More Why you shouldn't scoop up Thailand stocks

"Interest rates are pretty low, deposit rates are pretty low, so investment in the stock market is one of the limited options domestic investors have," Adithep Vanabriksha, deputy chief investment officer at Aberdeen Asset Management in Thailand, told CNBC.

Some analysts are outright negative on the market.

"Investors are effectively expecting a goldilocks outcome," Viktor Shvets, head of strategy research for Asia at Macquarie, told CNBC. "People assume it will just go back to normal, somehow geopolitics sorts itself out. I doubt that will be the case," he said, keeping an underweight call on the market.

Forecasts for 2-3 percent economic growth for this year are "very, very optimistic," Shvets said. "At best, Thailand could do 1 percent. I don't think 14-15 percent earnings per share (growth) estimates are likely either."

Even Morgan Stanley's Sharma said Thailand isn't one of his favorite markets. "The risk reward is somewhat attractive at this stage, but not unusually so," Sharma said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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