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Conclusion: The confluence of slowing growth, accelerating inflation, and interconnected risk surrounding Thailand’s domestic politics within the construct of a bearish Global Macro backdrop have us bearish on Thai equities with an asymmetric risk/reward setup.


Position: Short Thai Equities (THD).


Yesterday, for the second time YTD, we shorted Thai equities in the Virtual Portfolio. After having covered the bottom in the SET on February 10, we’ve waited for our price on the re-entry side, as well as for our bearish catalyst(s) to be closer in duration. As a refresher, those catalysts are: 

  • Growth is Slowing;
  • Inflation is Accelerating; and
  • Interconnected Risk is Compounding. 

We’ll quickly rehash our thesis on all three below; additionally, we encourage you to check out our January 27 note titled, “Shorting Thai” for further depth.

Growth is Slowing: In recent months, the Street has revised down their forecasts for Thailand’s 1Q11 and 2Q11 GDP growth to within an average of 10bps of our own bearish estimates, which we outlined back at the start of the year. Though usually we like to fade lagging sell side revisions, Bloomberg Consensus Forecasts for Thailand’s 3Q11 and 4Q11 GDP are still 150-200bps to high and we expect further downward revisions as Thailand’s high frequency economic data continues to come in below expectations and indicating a slowdown the underlying momentum of the economy.


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Inflation is Accelerating: We continue to flag this as the backbone of our bearish intermediate-term thesis on Thai equities. Simply put, from both an economic perspective (slower growth) and a policy perspective (higher interest rates), we think inflation will come to be the bane of many-a-Thai-bulls’ collective existence. From our daily analysis of buy-side sentiment, those who like Thai equities continue to believe that underlying growth momentum is strong enough to overcome a pickup in inflation, which we obviously disagree with (55% of Thailand’s economy is consumer spending).

As we pointed out in our note from Friday titled, “Elections in SE Asia: Consternation’s on the Ballot”, we believe the early timing of the July 3 election (seven months ahead of schedule) suggests the ruling party believes sooner rather than later is the best time to test the electoral waters. We think that’s because they see what we see – higher rates of inflation on the horizon and higher interest rates in the near future. The central bank agrees, saying recently that the anticipated removal of State subsidies on diesel is likely to add +100bps to the YoY growth rate of Headline CPI and +50bps to the YoY growth rate of Core CPI (currently at 15 and 30-month highs, respectively). Not ironically, July is when funding for the State Oil Fund is expected to run out. Lastly, Bloomberg Consensus is only expecting two +25bps rate hikes through the end of 2011. Should Thai inflation trend according to our expectations, we find this optimistic forecast to be well short of the action we are likely to see out of the Bank of Thailand.

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Interconnected Risk is Compounding: Perhaps the greatest risk we see in holding Thai equities on the long side is the geopolitical risk that is likely to hang over the market over the next 2-3 months due to the upcoming elections. Irrespective of outcome, we expect to see a return to the social unrest which gripped the streets of Bangkok in April/May of last year and helped precipitate a peak-to-trough decline of (-11.2%) in the benchmark Stock Exchange of Thailand Index.

Careful analysis of the situation reveals that protests of this magnitude (nearly 100 deaths) are potentially a probable scenario and that they could potentially exceed last year’s riots in scope. The results of recent polls conducted by both of the main opposition parties have each expecting to win a majority of the 500 open seats in the Thai House of Representatives. Even Vejjajiva’s own campaign coordinator concludes that “it’s a very tight race”, saying recently, “One time we are down; one time we are up. We can’t tell.”

The largest takeaway from this polling gridlock is twofold: 1) the Thai electorate is torn and supporters of the Puea Thai (red-shirts) are indeed mobilized; and 2) supporters of either party will be both heartbroken and outraged by what is likely to be a close defeat. Should the Democrats (yellow-shirts) manage to win, we expect the red-shirts to once again take to the streets in protest. On the flip side, should the red-shirts win, we are likely to see a second coup – either military or judicial – as both the armed forces and political elite of Thailand continue to strongly back the current ruling coalition. Such an occurrence is highly likely to result in a second round of protests as red-shirts take to the streets in outrage.

An additional downside risk to consider – from an admittedly US-centric analysis perspective – would be a breakout in the VIX, as that would be an additional headwind to international investor exposure to EM equities within the context of Thai’s own fundamental issues – just as it was last year during the Sovereign Debt Dichotomy scare. With the Debt Ceiling Debate kicking off in full swing alongside the end of QE2, we expect a similar breakout in volatility to dampen demand for risky assets in the coming months. Keep in mind last year’s April/May weakness in the SET was aided by a $2B foreign institutional investor outflow during the period. We expect to see similar results this time around as a function of the upcoming geopolitical consternation within Thailand.

Lastly, from a mean reversion perspective alone, Thai equities look particularly vulnerable having climbed +39.5% in the past year – good for the fourth highest return among all equity markets globally. Overnight, the SET closed up +1.22% to within 0.3% of its TRADE line of resistance at 1,089. From there we see an asymmetric risk/reward setup with (-5.2%) of downside to the intermediate-term TREND line of 1,029.

Darius Dale


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