Talk about a reversal of fortunes. Last year the Thai bourse market was the world's top performer, with the Stock Exchange of Thailand index clocking an eye-popping 115% gain. But after peaking in early January, the SET has dropped 22% so far this year, turning it into one of the worst performers. That comes even as Thailand's economy has chugged along nicely: First-quarter growth in gross domestic product hit 6.5%. So why the disconnect between the sagging equity prices and continued economic growth? Gravity has played a part. "It went up a hell of a lot last year," says Hugh Young, managing director of Aberdeen Asset Management Asia Ltd. in Singapore. "There was ample scope for profit-taking."
A lot of that money has been taken off the table by foreigners. The hardest-hit sectors include property, petrochemicals, and building materials, which, not surprisingly, were the top performers last year. Credit Suisse First Boston estimates that foreigners have been net sellers of $2.5 billion in Thai equities, excluding IPOs, in the first nine months of 2003, while they had been net buyers of $0.8 billion from January, 2002, until last September. Indeed, foreign ownership in the Thai stock market has fallen from 31% last September to 28% as of mid-June.
But the laws of gravity and profit-taking don't explain the whole downturn. Both local and foreign investors are in a sour mood. The list of concerns is long, including alleged government bungling of the avian flu epidemic earlier this year; sectarian violence in southern Thailand; and a delay in the planned privatization of the Electricity Generating Authority of Thailand, which would have been the country's largest-ever privatization. Some even blame investors' reluctance on a controversy surrounding Prime Minister Thaksin Shinawatra's aborted plan to buy a British soccer team. "People may be getting less sanguine about Thaksin," says James Squire, Hong Kong-based fund manager at Baring Asset Management. "His vision is being questioned."
The clearest explanation for the stock market drop, however, is purely financial: worry about slower corporate earnings growth as Thailand's economic recovery matures. Average earnings per share of the 415 companies on the SET surged 42% in 2003 but are expected to rise only 26% this year and just 13% in 2005, according to Credit Suisse First Boston. Higher oil prices and expected interest-rate hikes at home and abroad could also weigh on corporate profit margins.
But even if earnings growth slows, analysts say there is reason to believe Thailand's market is nearing its bottom. They say this year's negative news already has been factored into stock prices. And not everyone is convinced profit growth at Thailand Inc. is set for a steep tumble. While the bird flu epidemic knocked about 0.7% off this year's growth forecasts, Thai GDP growth ranks among the highest in Southeast Asia. Fixed investment is expected to grow 13.5% in 2004 and 10.8% next year, owing in large part to an ambitious $26 billion, five-year public spending scheme. What's more, the government is in good shape. Its debt as a percentage of GDP has fallen from a high of 57% in 1998 -- when the Asian financial crisis struck -- to 44% today. "I'm pretty bullish about the fiscal profile," says JPMorgan Securities Thailand (JPM)'s head of research in Bangkok, Sriyan Pietersz.
Corporate Thailand's health, meanwhile, remains stronger than ever by some measures. Thai companies are leveraged at an average debt-to-equity ratio of 90%, compared with 300% on the eve of the financial crisis in July, 1997. Banks continue to whittle away at their nonperforming loans, which are expected to decline from 13% of their portfolios now to 10% by yearend -- a far cry from the record 48% at the height of the crisis. So is this the time to buy? JPMorgan's Pietersz likes stocks based on domestic demand, such as Krung Thai Bank, retailer Siam Makro, and Siam Cement Group. Meanwhile, Bear, Stearns & Co. (BSC) ranks Thai stocks "overweight" in its latest strategy report. Among its favorite companies: Kasikornbank PLC and component maker Delta Electronics PLC.
Of course, Thailand still faces the risk of rising interest rates at home and in the U.S. and internal shocks such as further violence in the disaffected Muslim south of the country. Value-minded investors may want to take a chance on Thai equities, but they shouldn't be surprised if the ride gets rocky.
By Frederik Balfour in Hong Kong