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Terror, the Thai baht and Bangkok equities

Terror, the Thai baht and Bangkok equities
The Thai baht has depreciated to post-Lehman lows against the dollar.

The Thai baht has depreciated to post-Lehman lows at 3.6 against the US dollar.



By Matein Khalid/Macro Ideas

Published: Mon 24 Aug 2015, 12:00 AM

Last updated: Mon 24 Aug 2015, 9:33 AM

The tragic news from Bangkok hit me hard. I have fond memories of the Grand Hyatt hotel on Sukhumvit road and the bomb blast is a traumatic blow to tourism, estimated as 20 per cent of Thai GDP. The Thai baht has depreciated to post-Lehman lows at 3.6 against the US dollar. The military government of General Prayuth has not resolved the Red Shirt-Yellow Shirt schism that has paralysed Thai politics since populist former Prime Minister Thaksin Shinwatra's Thai Rak Thai government was overthrown in a military coup in September 2006. The Erawan shrine, ironically, stood at the epicentre of the precise area in downtown Bangkok where red shirt protestors clashed with troops that led to the loss of 90 lives in 2010. The revered King Bhumibol, an octogenarian and the world's longest serving sovereign, is in poor health. There is not much to smile about in Southeast Asia's Kingdom of Smiles in 2015.
Thailand is no stranger to political violence, coup d'etat, rigged elections, class warfare and provincial secessionism. The Thai tourist season begins in October, as winter starts in Europe, Russia and China and the Erawan shrine/Central mall area is usually crowded with foreign tourists, the reason half the bomb blast victims were not Thai citizens. This means the big chill in consumption spending and capex will continue China's yuan devaluation has increased pressure on Thai exports, already struggling since late spring. This is particularly true of cars, electronics and even rice exports to Europe and China.
Both General Prayuth and Yingluck Shinwatra did their best to offset awful consumer/capex metrics with ambitious, public infrastructure programmes. Yet Keynesian economics has not worked on the Chao Phraya River and public spending is barely 50 per cent of planned capex. I doubt if Thailand will even manage two per cent GDP growth in the next six months. No less than $9 billion of offshore money has exited the Thai stock market since 2012, discouraged by the grim realities of military coups, floods, street protests, political violence, FDI ice age, government (and governance) failures, loss of export competitiveness to Vietnam, Cambodia and China.
The fall in Chinese auto sales are a disaster for Japanese owned auto plants in Asia's self-styled Detroit. I expect political risk in Thailand will rise this autumn and the Bank of Thailand will cut its policy rate for the third time. This means a fall in the baht to 37 against the US dollar in the next six months is my base macro scenario. In fact, Thai corporate debt is 100 per cent of GDP and a Thai recession could well devastate banking non-performing loan ratios.
Friends ask me if Thai equities are cheap. Absolutely not. At 1,350, the SET index trades at 14 times forward consensus EPS growth estimates that I am certain will be cut this autumn. This means Bangkok trades at almost two sigma (standard deviations) above its valuation range since Thaksin first became prime minister. The optimal strategy is to remain short Thailand, since SET index earnings have fallen by 30 per cent since 2013. The SET index is down 10 per cent in 2015. I expect another 20 per cent fall in the next 12 months, possibly to as low as 1,150. World trade in Asia is shrinking. Ex-banks and oil companies, Thai equities trade a surreal 20 times earnings. The 12 per cent EPS growth consensus in Thai equities is a cruel joke only those who have never traded Siam equities can believe. Positioning is also negative since many Asian equity funds are overweight Thailand. So I see absolutely no reason for Gulf investors to bottom-fish in the Thai stock market.
China's State Council and its central bank have failed to stabilise the Shanghai stock market and Asian markets now face a liquidity shock that could well mean recession in 2016. Apart from India, Pakistan and Japan, Asian equities are in deep distress. So it is time to short Nifty at 8,450 and the Topix at 1,670. I will not short Pakistan at eight times earnings and the massive inflows from Hundi Offshore Capital AG/Ltd/SA/LLC. Asian debt markets will fail to act as shock absorbers, while global hot money flees as in 1998. Stay short Indonesian, Malaysian, Thai and Chinese country index funds in New York.


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