By Chris Oliver
HONG KONG (MarketWatch) –- Uncertainty over succession plans for Thailand’s monarch and a simmering battle between rival political factions could weigh on Thai stocks in the months ahead, analysts say.
The political strains might not be enough to kill the investment story in the Southeast Asian nation, but it may be time for investors to trim exposure.
“I wouldn’t be advising people to overweight Thailand,” says Forensic Asia Ltd.’s managing director Gillem Tulloch, in Hong Kong.
Tulloch, a former Bangkok resident who later headed research on the country for brokerage CLSA, said he’s worried about what lies around the corner for Thailand, even though the nation had been a relatively good model of development for the region.
One worry is the potential for violent clashes between rival political parties in the run-up to promised elections, which could take place as early as this autumn. There’s little hope of reconciliation between the People’s Alliance for Democracy, known by their trademark yellow shirts, and those loyal to the party of the former prime and billionaire Thaksin Shinawatra, who wear red shirts.
Bad blood has separated the rival political groups since the democratically elected Thaksin was ousted during a 2006 military coup, after a series of disruptive demonstrations by yellow shirts that were seen as providing political legitimacy to the move.
Long live the king
An even bigger worry, however, is the question of who will take over upon the death of King Bhumibol Adulyadej, the popular-but-ailing 84-year-old sovereign, who ranks as the world’s longest-reigning monarch.
Government of Thailand
“The monarch is the last revered institution in Thailand,” says Tulloch. “People don’t feel the same way about his successors.”
Thai stocks could tumble 20% to 30% in a single day when the king dies, echoing a similar drop in 2009 amid concerns over his health, Tulloch estimates.
A U.S. diplomatic cable released by the website Wikileaks last year reportedly said that senior Thai advisers to the king have expressed doubts about the suitability of heir apparent, Crown Prince Vajiralongkorn.
U.S. Ambassador Eric John conveyed advisers’ misgivings about the 50-something prince, who reputedly leads a playboy lifestyle, preferring to spend time in Munich with a mistress, apart from his wife and son who reside in Thailand, according to reports of the cable.
The cable was reportedly sent in January of last year and reflected views that included those of Gen. Prem Tinsulanonda. head of the privy council which advises the king.
Separately, some Thai observers worry that no suitable successor will be found, with the king’s eventual death to mark the end the royal line.
That could be bad news in a country where passions periodically boil over. Ninety-one people died during a weeks-long standoff last year between red shirts and the government that ended when the army was sent in.
Still, some believe Thailand’s political culture is flexible enough to handle the pressures without triggering a lethal conflict.
“When you have a more democratic or open society, where people can get out and air their grievances, it’s less likely you get these explosive revolutions hitting the streets,” said Brook McConnell, president of Hong Kong-based investment group South Asia Investment Group.
McConnell, a veteran investor in the region since 1992, sees inflation as a more serious threat to social order in Southeast Asia. Lower-income Thai families are more likely to feel the pressure of surging prices for rice and other daily staples, as these outlays make up a larger percentage of daily expenditures than for typical households in the West.
“On a worldwide basis, we are having a crisis in food that is just starting, and that is very destabilizing,” McConnell said.
Border tensions
Meanwhile, other risks hang over the Thai market. Recently several people were killed during an exchange of gunfire between Cambodian and Thai troops along a border area. It’s unlikely to signal the start of a deeper border war, but there were nationalistic overtones to the conflict which took place near the site of sacred Hindu temple.
McConnell says the border issues don’t weight seriously in his investment decisions, but concedes it’s an unknown that could return to haunt his portfolio.
“I don’t know how to hedge against an invasion,” he says.
In the past 12 months, Bangkok’s benchmark SET Index is up 40%, more than recovering its levels prior to the global crisis. Recent weakness, however, has seen the market off more than 8% from levels three months ago.
Much of the index is geared to commodity-related stocks, which means its a good source of leverage to the China growth story and can provide some benefit if resource prices continue their upward trajectory.
Thai companies learned the hard way of the dangers of excessive leverage during the Asian financial crisis of the late 1990s, implementing significant changes in their approach to business.
“Companies are in the best financial shape of any group of companies in Asia,” says Forensic Asia’s Tulloch. “In terms of financial stress, they have low [leverage] and high returns.”
Still, he says the big gains during the last two years mean Thai stocks aren’t quite the value proposition they once were. He adds that the index was protected from a serious shake-out during last year’s political showdown in Bangkok because of pent-up consumer demand and surging commodity prices, trends that may have run of steam.
Bangkok stocks tends to lead regional peers during recovery cycles — much as they did from the depths of the global financial crisis. The recent bout of weakness could be the market’s way of signaling trouble ahead, though it not clear that the market is a leading predictor during down cycles.
It may be better to phase into Thai stocks slowly at better prices in the future, Tulloch says, advising investors to keep some exposure, mainly in quality-run utilities, the prices of which likely won’t tumble too much if the political situation spins out of control.
