Political instability, massive flooding and a damaged tourist industry could be set to hamper Thailand-focused ETFs in 2017.
The MSCI Thailand Index, denominated in Thai baht, gained 26.6% during 2016.
The Stock Exchange of Thailand Index is up 2.1% year to date and more than 26% over the last 12 months, denominated in Thai baht. The SET 50 Index has generated slightly less at 2% and 25% over the same timeframes.
The performance was favourable compared to broad emerging markets return of 11%. Thailand, often considered the safe haven in Asia for foreign investors, is less correlated to emerging markets than other EM countries. GDP growth in the three months before June 2016 was the fastest in 13 quarters. A sharp decline in oil prices boosted the current account surplus and also supported the baht currency, giving domestic stocks a lift.
Going forward, investors are wary that Thailand’s new King Maha Vajiralongkorn Bodindradebayavarangkun, otherwise known as Rama X, has refused to ratify the military-penned constitution, further drawing out a three year-long saga which began with the country’s coup in 2014. The King has vowed to manage the country for most of the year from his estate in Germany, and has rejected a clause in the constitution which would require him to appoint a regent when he is away. The tensions could push the constitution back to the drawing board and delay elections until 2018.
The growing rift is important because the monarchy – popular with the Thai population – has affected the stock market in the recent past. During the week that King Bhumibol Adulyadej died, stocks fell around 6% but rebounded as investors hoped for a smooth transition of power to his son, as reported by the Wall Street Journal. Rama X was crowned King on 1 December 2016.
The country’s status as a business destination is still reeling from the recent Rolls-Royce bribery scandal, where the company paid officials and companies such as Thai Airways almost $37m to curry favour and buy its T800 engines, starting as far back as the early 1990s. The Junta government is under increasing pressure to investigate allegations of corruption.
Thailand’s GDP growth was 3.2% last year and is forecast to rise slightly to 3.5% in 2017, according to the Asian Development Bank, but massive floods in southern Thai regions in January have killed at least 40 people and left thousands with shelter, food and water shortages, threatening a humanitarian crisis. The flooding is forecast to impact tourism and economic activity.
Europe-listed ETFs tracking Thai equities fared better last year in foreign currency terms rather than domestic currency.
The db X-trackers MSCI Thailand Index UCITS ETF (LON: XCX4) is only up 0.9% year to date but has soared more than 42% in one year in Sterling terms. It costs 0.50%.
The underlying MSCI Thaland Index tracks 36 stocks, with 21.5% in financials, 20.5% in energy and 13% in consumer staples. Top holdings include 11.3% in PTT, a state-owned oil and gas company – also involved in the bribery scandal – and 9.3% in CP ALL Public Company, a convenience store chain. The index gained 26.6% during 2016 in local currency terms.
The second ETF option tracks the SET 50 Index, and is thus slightly more diversified. The Lyxor UCITS ETF Thailand SET50 Net TR (LON: THAG) has generated 1.1% year to date and 40.5% over 12 months. It costs 0.45%.
Both options are relatively expensive and not very liquid. While XCX4 holds $37m, THAG holds just $15.2m in assets. Both have been affected not just by the elevation of specific risks in Thailand but also the global investor retreat from emerging markets due to a slowdown of growth in China and new US President Donald Trump’s vow to renegotiate trade deals and put “America First”.
For much more diversified and cheaper exposure, the MSCI Emerging Markets Index tracks 855 stocks and holds around 2.2% in Thailand.
The cheapest ETF to track this index is the iShares Core MSCI EM IMI UCITS ETF (LON: EIMI) at just 0.25%.