Thailand’s Post-Coup Rally Is Over to Some Who Called It

There have been three military coups in Thailand since the 1990s. After each, the stock market has advanced, including this year: The benchmark index rallied 8.2 percent in the two months since the May 22 takeover.

Now, though, some of the strategists who foresaw the gains say it’s time to sell. Stock valuations have reached the highest level in 13 months, with the SET index trading for 13.7 times estimated earnings, a 23 percent premium to the MSCI Emerging Markets Index, according to data compiled by Bloomberg.

While investors have supported the junta’s pledges to fast-track spending and restore political order, Bualuang Securities Pcl, a unit of Thailand’s biggest lender by assets, and Maybank Kim Eng Securities (Thailand) Pcl say the rally has already priced in a recovery in Southeast Asia’s second-largest economy. The average year-end SET index target from 15 brokerages, including CLSA Ltd. and Citigroup Inc., is just 1 percent above yesterday’s close.

“We advised clients to begin reducing their holdings to lock in profit,” said Chaiyaporn Nompitakcharoen, a strategist at Bualuang who correctly predicted the market would rally in a May 26 report. “Share prices have gotten too far ahead of earnings and entered overbought territory.”

The coup in May that overthrew the government headed by Yingluck Shinawatra is the 12th since 1932. The SET index climbed 4.5 percent in the two months after the 2006 military takeover that sent Yingluck’s brother, Thaksin Shinawatra, into exile, and rose 15 percent following the ouster of Premier Chatichai Choonhavan in 1991.

Junta Spending

The latest rally came as Prayuth Chan-Ocha, the junta leader, accelerated payments of about 92 billion baht ($2.9 billion) owed to the nation’s farmers under a rice subsidy program. The military also plans to speed up infrastructure spending, including a dual-track train project that was ruled unconstitutional by Yingluck’s administration, and projects along the nation’s borders with Malaysia, Myanmar and Laos.

Thailand’s economy, which contracted 0.6 percent in the first quarter from a year earlier as political unrest hurt consumption and halted investments, is forecast to grow 1.6 percent this year and 4 percent in 2015, according to analyst estimates compiled by Bloomberg.

TIP Markets

Even after Thai valuations increased, the market is still more attractive than the two other so-called TIP countries, Indonesia and the Philippines, Credit Suisse Group AG analysts Sakthi Siva and Kin Nang Chik wrote in report dated July 15.

The Philippine Stock Exchange Index, which has rallied 17 percent this year, trades at 17.8 times 12-month estimated earnings, data compiled by Bloomberg show. Indonesia’s Jakarta Composite Index has a multiple of 15 after gaining 19 percent.

“We are more upbeat about the outlook of the economy and corporate earnings in the second half, with the strong recovery in public investment and domestic consumption,” Ekpawin Suntarapichard, an investment strategist at SCB Securities Co., said by phone on July 21.

The brokerage unit of Siam Commercial Bank Pcl, the nation’s No. 2 lender, expects the SET Index to reach 1,600 by year-end, or 5.2 percent above yesterday’s close of 1,520.81. The Thai stock measure jumped 1.4 percent to 1,541.56 today for its highest close level since June 2013.

Bulls are too optimistic about the prospect of a quick recovery in economic growth, according to Sukit Udomsirikul, the head of research at Maybank Kim Eng, the country’s biggest stock brokerage. The firm, which said on May 26 that the coup would boost the economy and stocks linked to domestic demand, has an end-2014 forecast of 1,500 for the SET Index.

Overbought Levels

The Thai equity measure sank 1.2 percent yesterday, the most in a month, after the gauge’s relative strength index had stayed above the 70 threshold that signals a reversal for 12 straight days. The equity index’s price-to-earnings ratio is about 16 percent higher than the five-year average, according to data compiled by Bloomberg.

While Thailand’s $424 billion stock market has a history of rising in the weeks following a coup, investors have lost money over the longer term. The SET index dropped 15 percent in the six-month period after the takeover in 1991, and declined 5 percent after Thaksin’s ouster.

“The upside gains for Thai stocks will be very limited,” Sukit said by phone on July 15. “The economy won’t show a high growth rate until next year.”

Foreign inflows into the stock market will probably slow after overseas money managers added $583 million to their holdings in July, heading for the best month since December 2012, according to KT Zmico Securities Co.

The coup has kept some institutional money managers from buying because of restrictions preventing them from investing in countries with military rulers, said Thanomsak Saharatchai, the head of research at KT Zmico. Prayuth has said it may take until the end of 2015 to hold elections and return power to a new government.

“Valuations are quite stretched,” Thanomsak, who was ranked in June as one of the two best investment strategists by Thailand’s Securities Analysts Association, said by phone on July 15. “Major inflows of foreign funds will be unlikely.”

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