For Thai markets, July may well be a make or break month as the nation’s parliament picks a prime minister, which would signal a successful transition of power after almost a decade of military-backed rule.
Since the May election — in which pro-democracy parties racked up the most seats but weren’t able to immediately form a government — global investors have sold more than a net $2.4 billion of stocks and bonds. The uncertainty from the prolonged process hurt the baht, which fell more than 3%.
Lawmakers will meet to endorse the leader of an eight-party coalition led by Move Forward Party on Thursday. Should Pita Limjaroenrat fail to get enough support, analysts expect second-place Pheu Thai to lead instead. Either outcomes will end stasis in government, and is likely to spur a series of market-friendly reforms and a relief rally.
“The election for prime minister should mark the end to political uncertainty for the next one to two years,” said Alan Richardson, a fund manager at Samsung Asset Management in Hong Kong. “For that reason, it should be viewed as the turning point for foreign fund selling and the start of a stock market recovery.”
The 10.3% slide in Thailand’s SET Index this year is among the steepest globally in major equity benchmarks, and the most in Asia. The nation’s bonds have seen a selloff of about $1.1 billion since the ballot.
Front runner Pita needs the support of more than a quarter of the unelected Senate, a body appointed by the royalist military establishment. Resistance to his leadership is based largely on Move Forward’s platform to amend a law that penalizes criticisms against the king and other royals. The parliament can meet more than once to vote until a clear winner emerges, further delaying the installation of a new government.
“Barring an extreme outcome, Thailand’s political risks look reasonably priced in at this point,” said Hong Kong-based Minyue Liu, an investment specialist at BNP Paribas Asset Management Asia Ltd. Once a government is installed, “the market should generally expect broad-based investor friendly reforms to follow.”
Liu and Samsung Asset’s Richardson have been buying Thai equities ahead of the selection. BNP Paribas is overweight Thailand in its Asia ex-Japan portfolio, according to Liu, favoring companies that will benefit from a tourism revival and additional infrastructure investments. Once there’s a government, Richardson plans to add banks, retail, tourism, telecom and utilities, including Advanced Info Service Pcl and Gulf Energy Development Pcl.
The coalition’s unified stance on revitalizing the economy includes decentralizing the budget and dismantling monopolies, especially in the liquor industry. It aims to raise wages and review power costs. While there are signs of an economic pickup with a revival in tourism, a global slowdown is hurting Thai exports.
“We expect the focus to shift back to the economic agenda once the political situation stabilizes,” said Darunrat Piyayodilokchai, head of equities at abrdn (Thailand). “Thailand, as an export dependent economy, has also felt the impact of China’s stalling recovery,” she said.
With valuations below the 10-year average of 16, Thailand equities remain attractive, Darunrat said, adding that abrdn is overweight in the small-caps and underweight large-cap in its regional strategy. Still, even after the selloff, the SET Index remains the most expensive in Southeast Asia with the one-year forward price-to-earnings ratio at 15.97 times.
According to Nomura analysts, a failure by Pita to become premier could trigger short-lived uncertainty that would likely weaken the baht. Still, the new government is increasingly likely to be led by Pheu Thai, an outcome that would likely be favorable overall to domestic markets, they said.
“There may be delays while negotiations continue and, under such uncertainty, I would rather keep Thailand assets underweight,” said Rajeev de Mello, a global macro fund manager at GAMA Asset Management SA in Geneva. “A new government would be positive for the domestic equity market. An announcement would also reassure foreign investors, who are still very cautious about Thailand.”
The SET Index may rally to 1,600 in a best-case scenario, according to Nuttachart Mekmasin, an analyst at Trinity Securities. The target suggests about a 7% gain from Monday’s close. On the other hand, should the leadership vote trigger street protests, the measure may drop an implied 7.1% to 1,390.
“While not a screaming bargain, we view that the type of perfect storm seen in the second quarter is most likely over,” said Amonthep Chawla, head of research at CIMB Thai Bank Pcl.
--With assistance from Anuchit Nguyen.