Will Thailand ETF Pay The Price For Protests? [iShares MSCI Thailand Inv Mrkt Index Fd]

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May 29, 2014 4:27pm NYSE:THD

thailandThe Thailand ETF was one of the best performing emerging market ETFs this year, having clocked a gain of about 20% till early May. However, while the economic indicators were in favor for the nation unlike many of its emerging market cousins, a heightened political

upheaval made the run for the Thai ETF anything but smooth in the last couple of days.

Thailand has seen severe political unrest for last six months that heightened early this month when the Thai Constitutional Court casted out Prime Minister Yingluck Shinawatra in a “judicial coup”. The protest was basically intended to drive out Yingluck Shinawatra’s administration, which was built on the political structure of former Prime Minister Thaksin Shinawatra.

The coups are in protest of an amnesty for transgressions dating back to the 2006 rebellion that expelled Thaksin Shinawatra, the brother of Yingluck Shinawatra. A snap election was conducted in February, but protesters interrupted polls leading the court to call the election unacceptable.

Following the removal of Shinawatra, anti-government activists insisted on an unelected leader to which pro-Shinawatra party warned of a “civil war”. As of now, the re-election that was due in July has been cancelled due to escalation in protests.

Economic Aftershock

Quite expectedly, persistent protests have left deep scars on the nation’s economic picture especially hurting government spending and the all-important Thai tourism industry (contributed 7% of the country’s GDP).

According to a Rodl & Partner report, in February, the Tourism Authority of Thailand predicted losses of Baht 90 billion in income if the political mayhem stretches another six months.

In the final quarter of 2013, Thailand’s GDP nudged up 0.6 % from the year-ago period marking the slowest quarterly growth rate in almost two years hurt by the protests. The National Economic and Social Development Board (NESDB) of Thailand slashed its investment growth estimate for this year to 3.1% from the previous forecast of 7.1% mainly to reflect lower public spending. Consumption growth estimate also almost halved to 1.6% from 2.9%.

Also, NESDB reduced its economic growth forecast to 3% to 4% from the previous range of 4% to 5%. This growth is also highly dependent on export numbers. If exports do not reach the 5% goal, Thai economic growth might fall to less than 3%.

Notably, persistent slowdown in its biggest trading partner, China, poses some threat to Thai exports (read: China ETFs Tumble to Start 2014). In March, the bank of Thailand cut its key interest rate to 2% pushing it down to the lowest level in more than three years primarily to bolster economic growth.

In keeping with the pessimistic backdrop, in April, World Bank also reduced its growth forecasts from 4.5% to 3%. As per World Bank, the anti-government riot is nothing but holding up the big ticket public infrastructure projects thus crippling the growth prospect even for the long term.

Market Impact

Quite expectedly, the market has penalized Thailand for its political turmoil. Foreign investors started to flee the nation.  Though the pure play on Thailand – the iShares MSCI Thailand Capped ETF (THD) – has gained about 9.34% year-to-date, the fund has fallen in the last one month wiping out its previous gains, while many are speculating that more losses could be ahead as well (read: Is the Thailand ETF’s Run Over?).

Bottom Line

We also currently have a Zacks ETF Rank of 4 (Sell) rating on THD. Needless to mention, the country’s potential will reach fruition only when the political upheaval cools off. However, even if the agitation is put to rest in the coming months, the turmoil has already done enough damage to mar this year’s growth rate.

Things might improve in the long term though. Investors should keep in mind that Thailand has suffered such coups before, but the nation has survived it all pretty much intact. In fact, the nation’s GDP expanded about 7.8% in 2010 despite facing a 10-week long pro-Thaksin protest.

However, this time the protest appears bigger and the near-term outlook seems uncertain. Thus, we caution investors to stay away from investing in THD as of now. Rather they should wait for the return of political stability before investing in Thailand.

This article is brought to you courtesy of Zacks.com

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