The Wall Street Journal-20080118-Thai Stocks May Be Defensive Play- Despite Political Turmoil- Economy Has Strengthened
Return to: The_Wall_Street_Journal-20080118
Thai Stocks May Be Defensive Play; Despite Political Turmoil, Economy Has Strengthened
Bangkok, Thailand -- For emerging-market investors with a stomach for political risk, Thailand could be a shrewd defensive play in the face of an economic slowdown in the U.S., some stock analysts say.
Political infighting in the wake of last month's controversial parliamentary election has already driven stock prices down significantly, preparing the ground for a potentially strong rebound in Thai banking and energy stocks, including Bangkok Bank and PTT, these analysts contend.
At first glance, Thailand looks like a place investors should avoid right now. A crucial tussle for power is playing out between the country's military-backed establishment elites and the populist supporters of Thaksin Shinawatra, the billionaire prime minister who was ousted in a military coup in 2006 and is now living in exile.
Thailand's military-backed government staged December's election hoping that the pro-Thaksin forces would be soundly defeated. Instead, the result has only deepened the leadership crisis, especially as it comes at a time when the health of Thailand's powerful and revered 80- year-old monarch, King Bhumibol Adulyadej, is becoming increasingly frail.
Mr. Thaksin's supporters in the People Power Party won a plurality of seats, and now the military's supporters are pursuing legal complaints hoping to disqualify the PPP or void some of the pro- Thaksin vote. Thailand's Supreme Court will rule on the PPP's legal status today, and PPP officials say they are ready to name a new coalition government tomorrow, if the decision goes their way.
Despite the political uncertainty, however, Thailand's economy has been quietly strengthening in recent months, buoyed by continued foreign investment in the auto sector and record-level exports of cars, agricultural products and electrical goods.
Both Ford Motor and Toyota Motor, for example, have made big investments in Thailand in the past 12 months. Overall, the country picked up $15 billion in foreign-direct-investment commitments in 2007, compared with $9.7 billion in 2006.
The domestic economy, which has been hurt by the political feuding between the Thai military and Mr. Thaksin's camp, is also showing signs of recovery after the central bank cut interest rates last year.
While the political impasse continues, "the good news is that the next government will inherit an economy that is enjoying sustained export strength and cyclical domestic recovery in response to 2007's rate cuts," Macquarie Securities wrote in a report last week.
That could give Thai stock prices a lift once the political situation calms down. Over the course of 2007, Thai share prices rose 26%, a bit short of the pace set by other regional markets such as Hong Kong, which gained 39% last year, and South Korea, 32%. But since the initial results of the Dec. 23 election were known, the benchmark Stock Exchange of Thailand Index has fallen nearly 3%, bucking the Thai market's historical trend of rallying after elections.
If Thailand's political direction becomes a bit clearer -- and particularly if the pro-Thaksin PPP is allowed to form a government -- stock prices may resume their upward path, driven in part by the improving domestic economy.
Indeed, a number of analysts point to strengthening consumer sentiment as a useful buffer to any fall in export growth resulting from a possible recession in the U.S. Moreover, Citigroup analyst Nithi Wanikpun points out that once a new government is in place, there is the potential for an increase in state spending on infrastructure projects that Thailand needs to improve its competitiveness against neighbors such as Vietnam and China.
For investors, the stocks most likely to benefit from this recovery are in the banking and energy sectors. Wimol Jeampoonsup, an analyst with Seamico Securities in Bangkok, says an improving domestic economy enabled banks to reduce their provisioning for bad debts in the fourth quarter last year. Loan growth is also increasing.
Mr. Wimol predicts that the combined net profit of Thailand's banks in 2008 will be more than five times last year's total, and that it will increase an additional 20% in 2009. The banking sector accounts for 15% of total market capitalization on the Thai exchange.
Seamico Securities' top pick in the sector is Kasikornbank, which it forecasts to reach 93 baht ($3.13) a share over the next 12 months -- 14% higher than Thursday's close of 81.50 baht a share.
Macquarie Securities has its eye on Bangkok Bank, the country's largest lender, as a primary beneficiary from increased corporate lending, if and when a new government is formed. In the next 12 months, Macquarie expects Bangkok Bank shares to hit 145 baht -- an upside of 29% on Thursday's close of 112 baht.
Citigroup's top picks, meanwhile, are geared toward more defensive stocks. It likes oil-and-natural-gas company PTT, which has fallen from 440 baht on Oct. 29 and closed Thursday at 320 baht.
Japanese Shares Rise;
Brazil Tumbles 3%
While stocks fell again in Europe Thursday, key indexes in Japan and Hong Kong snapped their losing streaks as bargain-hunters stepped in amid talk of a U.S. economic-stimulus package.
Despite the recovery in key markets, participants remained cautious and skeptical. Most markets are solidly in the red this year. "The correction isn't over yet," said Ben Kwong, chief operating officer at KGI Asia in Hong Kong.
Several Asian markets were sharply lower early Friday.
In HONG KONG Thursday, the Hang Seng Index jumped 2.7% to 25114.98, its first gain in six days.
In SHANGHAI, the Composite Index sank 2.6% to 5151.63, after China's central bank Wednesday raised the reserve requirement a half a percentage point to 15%.
In TOKYO, the Nikkei Stock Average gained 2.1% to 13783.45, snapping a four-session losing streak that had cost it 7.5%.
In LONDON, the U.K.'s FTSE 100 index closed down 0.7% to 5902.40.
In RIO DE JANEIRO, Brazilian blue-chip shares tracked losses in overseas markets to close 3% lower, dragged down by continued concerns about the U.S. The broader market as measured by the Bovespa stocks index lost 1,740.60 points to 57036.85.
