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Emerging Markets: Why It May Be Time For Investors To Bet On Thailand? (THD, VWO, EEM, FXI, SMCBF)

March 22nd, 2012

Martin Hutchinson:  There is a good reason investors have been clamoring to invest in emerging markets (NYSEARCA:VWO).  With the West spinning its wheels, the truth is there’s a good deal of money to be made in these markets in 2012.

One emerging market I like is Thailand.

That’s true even though Thailand has only been in the news recently for its terrible floods, which have disrupted supply chains worldwide. 

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That’s understandable; the floods drove down Thai gross domestic product by no less than 9% in the fourth quarter of 2011. 

Nevertheless, the level of global disruption caused by these floods indicates just how crucial Thailand has become to the world economy. 

And since the place is now well run, and looks to be set to have a nice catch-up year in 2012, with further decent growth in 2013, as investors we’d be wise look carefully there. 

Thailand: A Real Emerging Market

Here’s why things have changed for the better in Thailand. 

From 2001 to 2011, Thailand was engaged in a massive power struggle between the election-winning Thaksin Shinawatra, who drew support mostly from rural areas, and the Bangkok elite. 

Prior to that Thailand had developed very rapidly until the 1997 Asian crisis, but the great majority of its development had been in Bangkok, with innumerable wasteful real estate prestige projects. 

Thus Thaksin’s reorientation of the economy towards rural areas was a good idea.

But the Bangkok elite did not take kindly to it, and from 2005 engaged in street protests, prosecutions and undemocratic governments, slowing Thailand’s economic development as foreign investors became deterred. 

That changed in July 2011. Thaksin’s sister Yingluck Shinawatra won a big enough victory in the general election that she could not be stopped. 

Accordingly, Thaksin’s policies of free market economic development with an emphasis on rural areas rather than Bangkok have again been implemented. 

As a result, Thailand’s growth prospects look good, with The Economist‘s team of forecasters predicting 6% growth in 2012, after a flood-affected 0.1% in 2011 and GDP of $346 billion. In 2013 growth is forecast to be 4.6%.

Thai inflation is also low at around 3% and the government deficit is moderate at around 3.4% of GDP. Debt is also well under control even with a central bank that has been loosening somewhat to bring rapid recovery from the floods. 

With interest rates still at a reasonable 2.8%, there seem few economic obstacles to Thailand’s growth. 

Political obstacles are a different matter; though the government’s opinion poll ratings remain high; the opposition remains embittered and is heavily concentrated in the capital.

Thailand’s economy is somewhat short on energy and minerals but well balanced between manufacturing and services, with a strong agricultural sector. Thailand is a major exporter of rice and fishery products. 

In the manufacturing sector, its labor costs are now relatively low compared to other Southeast Asian centers and competitive with coastal China (NYSEARCA:FXI), so it benefits greatly from participation in China-centered supply chains. 

Its tourism sector is spectacularly successful. With 19 million visitors in 2011, up 20% from the previous year, Thailand has doubled the volume of ten years earlier. Bangkok is now third behind London and New York among top city destinations.

Thailand has a substantial oil industry but is nevertheless a substantial importer, so the country would benefit from an easing in global commodity prices.

How to Invest in Thailand

Since no Thai shares have full ADR listings and even the Pink Sheets companies are highly illiquid in New York, the easiest way to participate in Thailand is through the iShares MSCI Thailand Index ETF (NYSEARCA:THD). 

This fund has substantial net assets of $647 million, an expense ratio of 0.6%, a yield of 2.5% and a P/E ratio of 12. 

Given Thailand’s economic prospects, that valuation is relatively attractive, since like most emerging markets in South-East Asia, Bangkok has been much less affected than Western markets by the surge of global liquidity.

If you want to invest in single Thai company, you might want to consider the Siam Commercial Bank (PINK:SMCBF).

Over 100 years old, SCB is Thailand’s leading universal bank, offering a full range of financial services products. It’s currently trading on 11.6 times trailing earnings, with a dividend yield of 2.0%.

For investors looking for emerging market (NYSEARCA:EEM) growth, Thailand is not a bad place to start. 

Written By Martin Hutchinson From Money Morning

Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor  to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of  the Financial Services Volunteer Corps, Hutchinson became an advisor to  the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what  they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.

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