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Is Thailand a major threat to Asian equity funds?

02 June 2014

FE Trustnet asks whether the political coup in Thailand could spell trouble for Asian equity funds.

By Jenna Voigt,

Editor, FE Investazine

Last month, Thailand’s government was overthrown by a military junta, known as the National Council for Peace and Order, which swept the country with a militant coup – disbanding the country’s Senate and imposing a curfew on citizens.

Under such tumultuous conditions, many investors would think that markets in the southeast Asian country would fall and fall hard. However, this hasn’t been the case.

Since the coup on 26 May, the Thailand Stock Exchange has actually risen 1.71 per cent on the hope the new military-style leadership could bring some political stability to the region. How long this optimism can last remains to be seen, however.

Performance of index since May 26


Source: FE Analytics

Jason Pidcock, manager of the Newton Asian Income fund, says he thinks the Thai market can continue to rally, in spite of political difficulties.

ALT_TAG “The market is up 9.4 per cent year-to-date in sterling terms – out-performing the regional index by 4.2 per cent,” he said.

“I believe there is more to go and we’re at the beginning of a powerful bull market. It looks cheap, yields are good, international investors are mostly underweight or shunning the market entirely and I believe this year’s very low economic growth is priced in.”

“2015 should see a pick-up in growth – perhaps surprisingly so. The politics of the country are messy but it looks like we’re beyond the halfway stage in this process. I expect the military-led government to act quickly in giving the go-ahead on a number of infrastructure projects and calming business and consumer sentiment.”

“Before long, Thailand should regain lost tourist earnings and is well placed to capture a good proportion of Chinese tourists. Domestic investors seem to sense the worst has passed.”

Pidcock is overweight Thailand in his five-crown rated portfolio, holding 6.89 per cent in the country.

Matthews Asia’s Robert Harvey, who is also backing Thailand in a big way in the firm’s Asia Small Companies fund, says the coup didn’t come as a surprise to most investors in the region, which is why markets haven’t reacted violently to development since.

“As of late last week, the Wall Street Journal reported that there was a sense of “defiance and brewing discontent” amidst the uneasy calm on Friday. But, at this point, it’s difficult for anyone to know with any certainty what will happen or how Thailand intends to bridge the divide between its main rival parties,” he said.

“All of this probably leaves investors questioning whether they should head for the exit.”

“There is a sense that the process will be lengthy, and that a new constitution will be drawn, but so far the local financial markets have remained steady. The baht, and the equity markets have remained remarkably stable. This is partly because many investors have seen it all before. Political turmoil here is not new.”

“For several years, the country has been locked in a bitter political struggle between its pro-government “red shirts” and anti-government “yellow shirt” protesters.”

“The military has said it aims to “restore peace back to the country,” but, thus far, has given no timeline as to when the country would return to democracy.”

While Harvey says the coup was well-flagged, he is wary of the future impacts of the junta’s control over Thailand’s politics and says the team will wait and see how the action plays out in the country.

Over the short-term, he expects to see valuations decline, primarily led by a drop in tourism revenue, which accounts for 10 per cent of the country’s GDP.

However, he says that he plans to stick with investments in the country because he thinks underlying fundamentals will win out over the medium term.

“Over the medium term, we remain optimistic that a resolution can be found and that the country can begin to refocus on addressing some of the economic issues it faces,” he said.

“The events in Thailand are unfortunate; but they do not change our investment approach—using a long term perspective we continue seeking strong, quality companies that can operate in a variety of market environments.”

“We will continue to monitor the situation closely as periods of short-term uncertainty can create attractive opportunities for long-term investors.”

Pidcock and Harvey aren’t the only managers who have a significant weighting to. A number of funds, including the Liontrust Asia Income, Aberdeen Global Asian Smaller Companies and Templeton Asian Growth fund, hold even more.

Source: FE Analytics

Many of these funds have underperformed their peers over the last 12 months, but their long-term track record speaks for itself.

Over the last five years, Aberdeen Global Asian Smaller Companies, Newton Asian Income Baring ASEAN Frontier and Schroder Asian Alpha Plus have all been among the top-performing funds in the sector, with average returns of roughly 100 percentage points. The IMA Asia Pacific ex Japan sector made 62.38 per cent over this period.

The best-performing fund over this period is the five-crown rated Aberdeen Global Asian Smaller Companies fund, which made 135.36 per cent. The fund’s benchmark, the MSCI Asia Pacific ex Japan Small Cap index, gained just 62.71 per cent over the period.

Performance of fund vs sector and index over 5yrs


Source: FE Analytics

Investors who want to take an even more aggressive stance on the future prospects for Thailand may want to consider the four-crown rated Aberdeen New Thai investment trust, which is entirely focused on the country.

The trust has had a tough time over the last year, falling 28.27 per cent, though it has delivered strong returns of 350.61 per cent over the last decade.

The trust is now trading on a discount of 18.03 per cent, which is much higher than its one and three year averages. Aberdeen New Thai has been trading on an average discount of 14.28 per cent over the last three years.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.