Thai Awry: Coups and Changing Fundamentals in Thailand

The country of Thailand is no stranger to a military coup.  Indeed, the latest coup, officially declared on May 22nd, is the country’s 19th attempted coup since absolute monarchy ended in 1932.  Following months of political turmoil and fears that violent demonstrations were going to escalate, General Prayuth Chan-ocha took action and vowed to restore order and enact political reforms.  Given that martial law was declared on May 20th to calm the protesters and give the military the leverage to negotiate and enforce a peaceful settlement, it was perhaps not a major surprise to see things progress to an official coup.

Historically, Thailand has been ruled by the Bangkok elite, with implicit backing from the army and judiciary.  This hasn’t always been viewed favorably by the majority of the country’s rural citizenry, particularly in the north and northeast.  In 2001, the rural majority voted Thaksin Shinawatra into the office of prime minister, and he initiated policies that were beneficial to them.  Mr. Shinawatra ultimately fell victim to a coup in 2006, and many of his economic policies were ended at that point.  This angered Mr. Shinawatra’s support base, known as the “red shirts,” but the tide turned again in 2011 when they were able to elect his sister, Yingluck Shinawatra as prime minister.  She continued the economic policies of her brother until she was ordered to step down on May 7th of this year, after being found guilty of “abuse of power.”  This led to a political vacuum, which was exacerbated by the opposition to her Pheu Thai Party vowing to disrupt any election attempts.  The red shirts were again infuriated by the removal of a prime minister they democratically elected, and to avoid a bloody confrontation the military has stepped in to take power.

Politically, the next move is uncertain.  The military is tasked with the challenge of maintaining order and finding an even-handed compromise in appointing an interim prime minister who can pave the way for a return to democratic rule.  Expect an eventful summer as the red shirts will push for an election ASAP, while the opposition will stall, likely citing the need for more political reform.  Economic growth is unlikely to surprise positively, and consensus expectations of +2.5% GDP growth for 2014 may need to be revised lower.  Q1 GDP, reported on May 18th has already disappointed markets, as -0.6% year-over-year growth missed expectations of +0.4%.  At particular risk are domestically geared industries such as tourism and discretionary retail.  Additionally, the probability of an interest rate cut has greatly diminished since the Bank of Thailand will want to be seen supportive of the country’s currency.

History suggests investors may be wise to buy any coup-induced market weakness.  Harken back to Baron Rothchild’s infamous advice from the 18th century, “buy when there’s blood in the streets.”  The argument against applying that logic to Thailand’s situation is that with the military enforcing peace, there isn’t likely to be blood in the streets.  Moreover, Thailand’s market is not particularly cheap right now, with the benchmark SET (Stock Exchange of Thailand) Index changing hands at valuation levels above historical norms on both price-to-book and price-to-earnings ratios.  With the outlook for economic growth likely to weaken in the near-term, investors need to be careful with their positions in Thailand, because expectations for individual companies’ profits may suffer in kind.

Jeff Kilkenny, research analyst for Principal Global Equities, contributed to this article.


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