Thai Step to Elections Gives Best Asian Stocks Just Enough Fuel

QuickTake: Thailand's Troubled Democracy
  • SET Index of shares rises most in almost six months on Monday
  • New constitution sets the stage for elections by late 2017

Thailand’s vote to back a new constitution in a peaceful referendum did just enough to sustain Asia’s best stock market gains of 2016. Few investors heralded the plan as a return to full democracy.

The SET Index rose the most in almost six months on Monday and the baht outperformed after Thais backed the military-drafted charter that puts the country on track for an election next year. That gave added momentum to a 20 percent rally in Thai stocks this year, a 3.2 percent gain in the baht, and a 6.3 percent advance in local-currency sovereign bonds.

Foreign investors have pumped $12 billion into Thai stocks and debt this year as Prime Minister Prayuth Chan-Ocha boosted spending and economic growth quickened after languishing below 3 percent for the three quarters through December. Although the constitution gives the military influence in appointing the senate and prime minister, investors put the draft in the context of a dozen coups since 1932 and bloody street battles between political factions. Opposition has been limited by the arrest of dozens of activists this year.

“The result is not a game-changer because, de facto, the military is still in charge,” said Wilfred Wee, a Singapore-based fund manager at Investec Asset Management Ltd., which oversees $109 billion. “At the margins, it’s a step toward a more popular elected government, which is positive because some investments, especially at the multilateral level, may have been stalled because of uncertainty over the next government.”

The SET Index climbed 0.4 percent at the close in Bangkok after rising 1.6 percent on Monday, the most since Feb. 19. The gauge is trading at a 12-month price-to-earnings ratio of 15.4, the highest since February 2015. The baht was little changed following an 0.3 percent gain on Monday.

Thai stocks can extend gains, “but investors should be much more careful as the valuations are relatively expensive,” said Win Phromphaet, chief investment officer at CIMB-Principal Asset Management Co. in Bangkok.

Former Thai Prime Minister Abhisit Vejjajiva said in an interview late Monday that all sides of politics should respect the vote in favor of the new constitution, though he doesn’t believe the new charter will be the nation’s last. That was a change in tune from last month when the leader of the Democrats said he was opposed to the draft document.

The economy expanded 3.3 percent last quarter, compared with 3.2 percent in the first three months, according to a Bloomberg survey before data due Aug. 15. Growth has benefited this year from low interest rates at home and globally.

Investors may be taking the view that if the economy can do alright under the junta, it can do better under a somewhat restricted form of democracy, said Vikas Kawatra, head of foreign institutional investment at SCB Securities Co., a unit of Thailand’s second-biggest bank.

More Contentious

The new constitution, Thailand’s fifth in a decade, gives the military the right to appoint the upper house, permits a non-elected prime minister and would require future governments to adhere to the junta’s 20-year development plan. It may prevent the resurgence of Thaksin Shinawatra, the former prime minister popular with many poorer rural Thais, whose ouster in a 2006 coup set off a cycle of protests and military interventions.

For a Bloomberg quicktake on Thailand’s troubled democracy, click here.

“The vote essentially will make politics even more polarized and contentious,” said Trinh Nguyen, a senior economist for emerging-market Asia at Natixis SA in Hong Kong. “Most of the household debt is in the rural areas and their economic outlook is not getting better. This means that the rural-urban divide is only growing wider in Thailand.”

Thai government bonds were steady after a drop on on Monday pushed the 10-year yield up five basis points to 2.05 percent. In the short-term, the referendum doesn’t change the dynamics of local or Asian growth, said Manu George, the Singapore-based fixed-income director at Schroder Investment Management Ltd.

As long as the government continues to drive infrastructure investment and doesn’t meddle with the private sector, sentiment will remain positive, said Kar Tzen Chow, a Kuala Lumpur-based fund manager at Affin Hwang Asset Management Bhd., which oversees $7.6 billion.

“For those who have looked at Thailand long enough, they realize that the referendum is just another day in Thailand,” he said. “People are looking past the referendum and looking at the recovery picture.”

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