A Thai Affair: Ten Years Wiser

This week marks the tenth anniversary of the Asian Financial Crisis. It was ten years ago that Thailand floated the baht, triggering a series of events that saw other currencies and markets plunge in value, throwing the region into economic chaos.

As part of CNBC.com’s review of the Asian Financial Crisis, this week’s A Fund Affair features the Templeton Thailand Fund. Why this particular fund? Templeton, for better or for worse, launched its Thail fund on 20 June 1997, just two weeks before the crisis hit. But before we go into the fund’s details, let’s take a look at what happened ten years past.

By the start of 1996, the Thai economy was already experiencing a slowdown. The crisis erupted in the summer of 1997. A number of domestic and external shocks had revealed in the preceding months, weaknesses in the Thai economy that, until then, had been hidden by the rapid pace of economic growth.

Thailand, like the rest of the region, been experiencing strong growth – averaging almost 10% annually from 1987 to 1995. The establishment of the Bangkok International Banking Facility in 1993 attracted large amounts of capital inflows, much of which was in the form of short-term debt.

The Bank of Thailand would allow local banks to borrow funds offshore at prevailing international interest rates. These banks would turnaround and lend these funds locally at double the interest. This fueled reckless investments and unwarranted increases in asset valuation.


The Thai authorities at the time seemed oblivious to the mounting severity of Thailand's economic problems and the need for policy action. Finally, in the absence of any kind of policy action, and after a desperate defense of the baht by the central bank, the government was forced to float the currency on 2 July, sparking off the crisis.

The baht went into a freefall, depreciating 8% on the day of its float. Two weeks later, the baht was down by 15%. By mid-September, the baht had lost 30% of its pre-crisis value and would reach its nadir, below 50 to the U.S. dollar in January of 1998. Thailand’s SET Composite Index took a beating, shedding 455 points to close the year at 372.69. Over half of its market capitalization was wiped out.

This was the backdrop into which the Templeton Thailand Fund was launched.

The Fund

Templeton Thailand Fund

Fund Size US$176.41 million
NAV US$9.84
Management Fee 2.1% per annum
Expense Ratio 2.53 %
*As of 30 April 2007

Mark Mobius, fund manager for the Templeton Thailand Fund says the purpose in setting up the fund was to allow investors to participate in Thailand's long-term economic growth. According to Mobius, historical data had shown that over the long-term, investments in stocks would do better than cash or fixed income investments. There were some hints that the Thai baht was overvalued. However, in the long-term, these things would usually correct themselves.

Templeton’s strategy is straightforward -- look at earnings and cash flow five years out and select companies with the most attractive valuations. Templeton also favors stocks that trade at discounts to asset value, have good dividend yield and a strong balance sheet. Macro events and country politics are taken into the financial modeling when arriving at these five-year numbers.

That the strategy did not change when the crisis struck. “We continued to focus on buying stocks that traded at significant discounts to their intrinsic values. The only change was there were plenty of bargains after the crisis,” said Mobius.

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Templeton has consistently outperformed the SET Composite Index the past ten years. Mobius attributes this to discipline in sticking to their value-oriented, bottom-up stock picking style. Mobius does not favor any particular sector, but feels investors should expect to stay invested in the fund for at least five years. If they do so, they can expect to do much, better than leaving their money in bank deposits.

The Affair

In writing this column and other articles for the Asian Financial Crisis anniversary, we have spoken to many analysts, economists and market strategists. They have all said the same thing – investing in Thailand is a big risk. There are better markets to put your money in.

While the country has recovered nicely from the financial crisis, with gross domestic product far above pre-crisis levels, Thailand has not performed as well as its neighbors Malaysia and Singapore. What’s more, in comparison to other Asian countries, it is not exactly the epitome of political stability.

Just last September, Thaksin Shinawatra, the then Prime Minister, was ousted by a military coup. The military canceled scheduled elections, suspended the Constitution, dissolved Parliament, banned protests and all political activities, suppressed and censored the media, declared martial law, and arrested Cabinet members. This was the prelude to the botched attempt by the government to impose capital controls this past December, which triggered a 15% drop on the SET index in just one session – the worst rout for that market since the Asia crisis of 1997. These measures were for the most part, reversed.

The current political crisis and subsequent economic slowdown in Thailand is a good example of the risks involved in investing in emerging markets. Domestic consumption and investment has been disrupted resulting in slower quarter-on-quarter GDP growth and a lower GDP forecast for the year (4.2% - 4.7% from previous forecast of 4.2% - 4.9%).

Gillem Tulloch, head of research (Thailand) for CLSA Securities thinks that the political risks are high. "The junta is gaining in size and organization. While I do think there will be election, it’s not a certainty. What’s more interesting is whether or not the election will be deemed as legitimate. The ruling junta has banned 20% of the political parties."

Tulloch feels that if there is an election and everything goes smoothly, then Thailand should see a recovery in consumption and investment, which could lead to a stock market rally. But there are no guarantees.

Furthermore, if there is some kind of investment recovery, Tulloch believes that it will not be as strong as people expect, simply because there are other factors at work, in particular, rising commodity prices. Thailand runs the biggest commodity deficit in Asia. Rising commodity prices have contributed to the slowdown of the Thai economy.

For those still keen on Thailand, Tulloch recommends picking selective stocks in the banking system. His top pick – Siam Commercial Bank – which is one of Templeton’s top ten holdings.

Templeton’s Mobius does not share the pessimistic outlook for Thailand. He thinks investors should be undeterred by recent events "because Thailand has always had political upheavals, central bank debacles, and questions about corporate governance. In fact, the situation is getting better, not worse."

Mobius adds, "The most important lesson is to buy when others are despondently selling. The current political problems are unique. Thailand has always had such problems and we can expect them to recur in the future. When stock prices fall as a result, they should be viewed as buying opportunities".