Over the past two weeks, the local and international press have covered news of student protests and resignations of Thailand’s economic team and ministers. The protests, though relatively small at this stage, may worry investors given Thailand’s history of long and over protracted anti-government protests, some of which have led to a coup d’état.
Anxiety caused by the sudden resignation of ministers and speculation over their replacement by novices should logically weaken the stock market – yet, it may not be the case.
The stock prices could fall, but it will be for a different reason: the slumping economy which has been hit hard by the COVID pandemic.
Political uncertainty and the start of a fresh wave of anti-government protests will only add to the already fragile investor sentiment.
This is not the first time that political instability is ignored by investors.
Although strong leaders have caused markets to rise or fall historically – take, for example, the election of Donald Trump in America and Narendra Modi in India, both of whom caused a major change in investor sentiment – Thailand’s economy has been riddled by so many political changes that its normal growth level has fallen from between 3 per cent and 5 per cent per annum in the first decade of this century to its current level of between 2 per cent and 3 per cent per annum.
Over the last decade, Thailand’s economy has weakened due to structural deficiencies, inept politicians, and the loss of a competitive edge.
Since the departure of Thaksin Shinawatra in 2006, there hasn’t been a single government that has made any lasting impact.
During the first term of his election, Thaksin focused on policies to boost local consumption, spur private investment, and improve infrastructure.
His plan to make state enterprises public attracted foreign investment and helped Thailand strengthen its automobile production and establish Thailand as a major petrochemical producer.
His policies were interrupted, however, by the army as they staged a coup in 2006.
History shows that the opposition when in power tend to reverse some of the policies implemented by the preceding governments and the military government was no exception.
The following government formed by the Democrat Party in 2008-2010 repeated it by promoting different policies.
Frequent reversals or change of directions may give the impression to investors that political changes are relevant. It is hard to see much impact on an economy facing structural deficiency and regional competitiveness, however.
The structure deficiency refers to ageing demographics, never-ending constitutional changes, inability to improve labor skill and inability to compete with emerging economies in the neighborhood.
And to top it all off, the longevity of democracy.
Exports and Tourism Came to Rescue
In the last decade, exports and tourism have rescued the Thailand economy.
While the local consumption is healthy, its pace of growth is slowing in the backdrop of an aging population and the government’s perceived high consumer borrowing level.
The impact from the much-touted and over-hyped mega spending on the infrastructure has been diluted by overstretched timelines. Mega spending though in the works now is extended over a long period to create the “bazooka” impact on the economy.
The neighboring nations, meanwhile, have started the move at a rapid pace, diluting whatever impact the mega spending would make.
Adoption of new technology is another area where Thailand is failing.
While the 5G mobile technology may have become available in 2020, lack of skilled labor in the technological world may leave the present government’s initiative to establish an Eastern Economic Corridor just a buzz word. We know that days of cheap labor to attract foreign investment are long gone.
In the backdrop, it is quite difficult for any political party with a short-term mandate, which is often used up to thwart public protests, to change the course of the economy when the structural advantages are over.
Regional Comparison
To assess the impact of political changes, we looked at the performance of stock indices of Thailand, India, Indonesia, Malaysia and Hong Kong – all of which have seen major political changes over recent years.
To make the comparison interesting, we selected May 22, 2014, as the start date for this analysis. It was the day when Prayuth Chan-o-cha, the incumbent Prime Minister since then, engineered a military coup.
In the same period, India elected Narinder Modi’s party with a thumping majority. In a way, this week was the start of the dark days of Thailand and good days for India.
To make the comparison easy, we changed the currency to a common denominator i.e. US dollars.
As you may observe major indices of Thailand, Hong Kong, and India have moved almost hand in hand during this period when both India and Thailand elected the same leader for the second term.
Indonesia and Malaysia, which also saw political changes, have underperformed.
While there are multiple factors for the market’s performance, the above chart shows that political change is not as powerful as many perceive.
What’s Next For Thailand?
Thailand economy is in dire straits – you can read many analysts’ reports but all are predicting a contraction of up to 10 per cent in 2020, followed by, perhaps, a gradual recovery by the end of 2021.
If these predictions come true, which sectors are at most risk?
Our readers don’t need to be experts to know that these industries are dependent on tourism, and exports have been the worst hit.
Among others, the financial sector bears the biggest brunt of a slowing economy almost every time and it is no different this time.
Even though in relative terms, the SETBANK index may be pricing in most of the bleak future as they have significantly underperformed the SET Index, things can always get worse for banks as deterioration in asset quality will be fully known by end of 2020.
Another sector to avoid is ‘property.’ A slowing economy leads to avoidance of long term commitment such as property purchase. There are no bargains in the market to hunt yet.
The graph below shows that utilities and consumer goods stocks have performed very well, beating the SET Index returns.
While utilities offer steady growth and dividends, it is interesting to see the performance of consumer goods stocks given the consumption growth has been slow.
The key to their performance, however, lies in the consumer goods firms’ ability to act as sellers of essential goods and generate growth by gaining market share through expansion and acquisitions.
Take CPALL and HMPRO, for example, both have gained market share by eliminating mom and pop shops and have improved margin through economies of scale.
The graph shows that the commerce sector has performed extremely well relative to SET and other sectors. Vertical bars are the change in GDP growth each quarter.
You may see the bank’s sector as the worst performer, but while it may perform poorly over the next six months, the recent quarter results show only part of the economic pain caused by COVID-19.
Which Stocks to Own?
This is a difficult call to make given that we feel the SET Index is due for a correction as the current valuation is expensive relative to the economic reality.
The question is “are investors pricing in an economic recovery?”
Perhaps, not.
However, on a performance basis, we recommend to hold or buy firms with established franchises such as CPALL, HMPRO, GLOBAL, MEGA, and BJC.
Retailers such as CPALL, HMPRO, GLOBAL and BJC have long demonstrated its franchise value and will see profit recovery by stealing market share. Their margins and profit may suffer in the short term but investors will continue to rate them valuable due to long term growth ability.
Other firms such as MEGA, the maker of pharmaceutical drugs and a global distributor, is benefiting from the pandemic as more and more people buy vitamins and immunity enhancing drugs.
However, the share price of these companies may fall when SET fall but they will outperform the index as they have done in the past.
Regarding our case of buying, we will discuss in length in our write up next week.
