Thai Baht Plunge Is No Bear Market Sign to Coup-Savvy Investors

Within a minute of Thailand’s army announcing a coup, the baht fell 0.6 percent versus the dollar. Templeton Emerging Markets Group and Samsung Asean Equity Fund say any market weakness will be shortlived.

“We view the current military coup as likely overall positive as it creates a more stable environment,” Mark Mobius, who oversees about $50 billion as Templeton Emerging Markets Group’s executive chairman, said by e-mail. “The prognosis for Thailand is good given that direct foreign investors want stability in the country.”

Overseas investors pulled $408 million from Thai stocks since martial law was declared early on May 20, according to exchange data, helping send the benchmark SET Index in Bangkok down 0.7 percent this month. The baht, the worst-performing currency in Asia in May, was 0.1 percent stronger today at 32.563 per dollar as of 7:19 a.m. in Bangkok following a 0.4 percent decline yesterday.

While Credit Agricole CIB, Commonwealth Bank of Australia and Mizuho Bank Ltd. expect short-term weakness in the baht, the coup may provide certainty in a market that has endured 12 military takeovers since 1932, Mark Williams, chief Asia economist at Capital Economics in London, said by phone.

“The stock market could fall tomorrow on a knee-jerk reaction to heightened perceived political risk, but it should be an opportunity to start buying near the point of maximum pessimism,” Alan Richardson, whose Samsung equity fund beat 96 percent of peers tracked by Bloomberg in the past five years, said in a phone interview from Hong Kong. “We are approaching the end game to the political crisis.”

Lasting Resolution

The SET Index of shares gained 0.2 percent in Bangkok yesterday before the coup announcement, extending this year’s advance to 8.2 percent. The yield on Thailand’s 10-year bonds climbed two basis points to 3.79 percent. The iShares MSCI Thailand Capped exchange-traded fund fell 1.1 percent to $73.69 in U.S. trading hours.

“It could be positive for financial markets in the near term by reducing uncertainty and reducing the risk of the political standoff turning violent,” Williams at Capital Economics said. “But it underlines the scale of the divide in Thailand and suggests that a lasting resolution to the political conflict is a long way off.”

The rift between the largely rural-based support for former Prime Minister Thaksin Shinawatra, who was ousted in a 2006 coup, and his royalist opponents has polarized Thai society and weighed on production and tourism. The nation will probably have the slowest growth among its major Southeast Asian peers this year, according to Bloomberg surveys.

‘Economic Standstill’

While yesterday’s military takeover “probably helped prevent further bloodshed and full-blown political confrontation, the problem is that the uncertainty that follows may lead to an economic standstill,” said Kelvin Tay, chief investment officer of South Asia Pacific at UBS Wealth Management, which oversees $2 trillion.

UBS Wealth has been underweight Thai stocks since November and is unlikely to change its position until there’s a government in place and a resolution to the crisis, he said.

Stocks on the 528-member SET Index trade at 13 times projected 12-month earnings, compared with multiples of 11.4 for the MSCI All Country Asia ex Japan Index and 10.8 for the MSCI Emerging Markets Index.

Baht Outlook

“The rubric goes that one should buy any market when there is blood on the streets, but that suggestion arose because blood on the streets historically caused the market in question to dip to levels that were too cheap to ignore,” Sally Macdonald, head of Asian equities at Marlborough Fund Managers in London, said by e-mail. “That cannot be said of the Thai market at present.”

The baht may weaken 1.4 percent to 33 per dollar “in the next couple of sessions,” according to Frances Cheung, head of Asian rates strategy at Credit Agricole in Hong Kong. Mizuho Bank’s senior economist Vishnu Varathan said the baht may drop to 33.5 per dollar. The currency’s one-month implied volatility jumped 36 basis points to 6.07 percent yesterday, the biggest increase since August, and was little changed today, according to data compiled by Bloomberg.

The imposition of martial law was “credit negative” and will further damp economic growth,’’ Moody’s Investors Service, which along with Fitch Ratings and Standard & Poor’s rates Thailand at the third-lowest investment grade, said in a note yesterday. Fitch will monitor events closely, according to Andrew Colquhoun, head of Asia-Pacific sovereigns in Hong Kong.

Thailand’s economy shrank 0.6 percent in the three months through March from a year earlier, data showed this week, missing the median estimate for a 0.4 percent expansion in a Bloomberg News survey of 23 analysts.

“There would be negative implications for the sovereign ratings” if political developments suggest that widespread violence has become likely, said Agost Benard, associate director of sovereign ratings at S&P.

Before it's here, it's on the Bloomberg Terminal.