The Thai stock market has gained 9% in the first half of the year; however, with a 7% strengthening of the baht, foreign investors enjoyed a 16% return. There were some inflows due to expectations of MSCI increasing Thailand’s weight in its Emerging Markets index.
Challenging for General Prayuth Chan-ocha to form a government
It has been particularly hard for the new Prime Minister, General Prayuth Chan-ocha, to form a government. This government is likely going to have a hard time getting things done thanks to very strong opposition parties, namely Puea Thai and Future Forward.
Expect this government to be a transition to the next stage of democracy. Despite the military government drafting the constitution and other regulations to be favorable to maintaining power, we see this current government as a transition towards deeper democracy.
Thai exporters have a tough time with a strong Baht
The Thai economy is driven by exports and tourism, and with the strong Baht, the environment for exporters to compete on the global market is going to remain challenging. As such, export-driven companies are likely to see their share price face headwinds.
The ASEAN markets are trading above Asia ex Japan on 2019 consensus estimates and analysts generally have low earnings growth expectations, so a large re-rating of valuation is unlikely. However, the run-up in momentum, and that the SET index trades below its January 2018 peak, could offer some further upside.
For exports, currency matters more than the US-China trade war
The current “ceasefire” in the US-China trade war does not mean resolution, though we expect that a resolution is coming soon. Thailand and Asia seem to be already hit by a shifting of the supply chain out of Asia.
The good news for Thailand is their free-trade agreement with China, its other top trading partner besides the US, which allows for a free flow of goods with minimal tariffs. But the strong Baht is a tough headwind to overcome. Currency matters more than the trade war for Thai companies.
Hard to see a significant weakening in the Thai Baht
It is hard for the Bank of Thailand to weaken the Baht as the government 10-year bond yield is already pretty low at 2.2%. Low and stable inflation as wells as a generally good environment could keep flows coming into Thai government bonds. Moreover, with that, the Baht has some safe-haven status as Thailand has relatively large international currency reserves.
Since the US is a top export market for Thailand and with Thailand having a significant trade surplus with the US, the threat of getting on the “US watch list for currency manipulation” could impact how much Bank of Thailand is willing to intervene to weaken the Baht.
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