The Thai market has been strong for the year to date, in spite of a number of political and economic challenges. Can it make progress from here?

- The transition to crown prince, Maha Vajiralongkorn, has progressed peacefully, but not without some economic disruption

- Nevertheless, the economy has recently grown ahead of expectations

- The outlook for Thai companies remains strong, with some compelling opportunities

Thailand has faced a number of challenges over the past year. Most important was the death of the much-loved King Bhumibol Adulyadej at the age of 88, on 13 October 2016. There had been fears that the long-awaited death of the popular king would trigger unrest, but the crown passed peacefully to his son, crown prince, Maha Vajiralongkorn.

However, his death did not come without some disruption. The military-led government imposed a one-year mourning period on the state sector and many private firms have chosen to follow suit. Domestic business activity ground to a halt in the month following his death and this had an impact on consumption, which in turn hit corporate earnings.

The economy has subsequently bounced back, growing at its fastest pace in four years in the three months to June of this year, led by tourism and farming output. Gross domestic product rose 3.7% year on year in the second quarter according to the country’s National Economic and Social Development Board, ahead of expectations (1.).

There are still obstacles. Household debt is relatively high and this acts as a brake on consumer spending. The strong rally in the currency has put a dent in the country’s export market. However, inflation is under control, allowing the central bank to keep interest rates at 1.5% (1.).

Markets have shown themselves resilient in the face of these challenges. In 2016, the markets were very strong – up almost 20% for the year to date in local currency terms (2.). Part of these gains came from the strong performance of the Thai baht, which has been one of the top-performing currencies in Asia. Also, the market has benefited from improving commodity prices, as around one-fifth is in energy companies. However, the improvement in corporate earnings has been the real driver of stock market growth, once again showing that Thai companies can weather political and economic pressures to deliver good returns.

Investors may ask whether they can reasonably expect the Thai markets to move higher after such a strong run. We believe recent growth does not mean that there is nothing left for investors. The political backdrop is relatively benign now that the transition to the new King has been made. The military – still in charge – helped smooth this transition, but have a challenge ahead in delivering full and free elections next year. This has the potential to trigger conflict, but still represents progress for the country and is a sign of increased stability.

More recently, the Thai market has underperformed the rest of Asia and this, coupled with improving corporate earnings, has brought valuations to more reasonable levels. In aggregate, the market is still below its 2013 highs and, historically, has shown itself capable of lengthy periods of expansion. Markets rose steadily from 2002 to 2007, for example, and again from 2008 to early 2013.

Most importantly, the fundamentals for the companies in which we invest are still very strong. We see many companies showing good progress, with strong cash flow and profit growth. They are paying out higher dividends to investors. The Thai market yields almost 3% in aggregate. Thai companies are drawing strength from improvements in the wider region, including the fast-growing economies of Cambodia, Malaysia and Vietnam, and from the relative stability of China, an important trading partner.

Nevertheless, it is a market that requires some navigation. The Thai market is one of the broadest and most diverse in Asia and offers plenty of choice for investors. The Stock Exchange of Thailand currently has over 580 listed companies with a combined market capitalisation of around USD $460 billion. However, in spite of this diversity, certain sectors make up a significant proportion of the MSCI Thailand index. Financials, for example, are over one-fifth of the index, but some have seen an increase in non-performing loans and some caution is warranted. Energy is also a significant part of the index, but can be cyclical and is dependent on commodity pricing.

Areas such as life insurance – where we believe there is real opportunity - are only lightly represented in the index. Penetration of insurance across Thailand is low and has scope to grow considerably. We have just under 10% of the Aberdeen New Thai trust in this area. We have also been increasing our weighting in property companies more recently, to harness the urbanisation trend in the country. We believe the market merits a stock picking approach to target the best opportunities.

The Thai market has much to offer long-term investors in search of both capital growth and an alternative source of income. Thai companies score highly on measures such as return on equity, corporate governance and dividend payouts, and have proved themselves capable of navigating some tough political times.

The Aberdeen New Thai trust is the only investment trust investing exclusively in Thailand. It was established in 1989 and the managers have invested through good times and bad. We have specialist, on-the-ground knowledge of the Thai markets, putting us in a good position to capitalise on the strongest growth opportunities in the country, while avoiding the pitfalls.





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Issue Date: 11 Oct 2017