It is time to look beyond Thai stock market

Fuelled by rapid rise in domestic consumption, the TIP economies showed superior growth and resilience amid macroeconomic uncertainties and sluggish growth in the rest of the world. Stock markets reflected such economic fundamentals: The SET Index rose 250 per cent in five years, outperforming the MSCI Asia Pacific ex Japan, which rose 100 per cent, and the S&P 500, which climbed 70 per cent.

But to assume that the Stock Exchange of Thailand will continue to outperform is to be complacent at best, because the next five years could be a lot different from the last. 

Beginning this year, Thailand’s domestic consumption is showing signs of weakness as the effects of government stimuli such as the first-car-buyer tax incentive, a cut in corporate and personal income-tax rates, a minimum-wage increase and rice-pledging scheme wane. 

In contrast, the so-called G3 economies are beginning to gain momentum. The United States is showing strong improvement in both the labour and property markets. The euro zone has emerged from double-dip recession as the sovereign debt crisis eases. And in Japan, aggressive monetary policy and structural reform measures are pulling the economy out of the “lost decade”.

Asia could stand to benefit from exports as demand from major economies recover, but Thailand might not be in a position to take full advantage of this recovery. Thai exports, which consist mainly of integrated circuits, hard-disk drives and food products, are not in the area of strong growth. On the other hand, North Asian economies such as Taiwan, South Korea and mainland China, which are deeply integrated to the global supply chain of smartphones and tablets, products that are in high demand, could have greater leverage for the next leg-up.

Valuations are not in favour of Thai equity, either. With a strong run over the past five years, the SET is looking expensive when compared with its Asian peers. It is currently trading at a price-to-earnings ratio of 14.5 times 2013 earning estimates, a 12-per-cent premium over the MSCI Asia Pacific ex Japan index and 1.1 standard deviation above historical average P/E.

While we maintain a bullish view towards equity as an asset class, we do not expect Thai equity to lead other markets in this phase of economic recovery. We see much larger upside potential from the US, Japan and North Asia stock markets due to stronger economic fundamentals and more attractive valuations, and we strongly advise investors to seek opportunities beyond the domestic stock market. 

In our latest issue of the “Tisco Wealth Strategy Report”, we lower our recommendation on Thai stocks to “trading buy” from “buy” while we maintain a “buy” recommendations on US, Japan, and North Asia markets.

 

_ Komsorn Prakobphol is a senior investment strategist at the Tisco Economic Strategy Unit. He can be reached via www.tiscowealth.com or [email protected].