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CONCLUSION: We think  the risk of political unrest is overblown/priced in the immediate term. Further, you’re likely to see a rapid dissipation of the negative sentiment currently surrounding Thai equities if the Pheu Thai opts to acquiesce to the demands of the Constitutional Court.

Answering the question in the title from a fundamental perspective, our answer is “quite likely”. This is a function of our analysis of the effects of recent bouts of political instability on Thailand’s benchmark SET Index, in that the current draw-down is roughly in line with previous sell-offs: 

  • APR/MAY ’10 protests of the ruling party (then Yellow Shirts): -11.2% peak-to-trough decline;
  • JAN/FEB ’11 protests of the’00 border negotiation agreement w/ Cambodia and demanding the Thai military force Cambodians to withdraw from disputed areas:  -9.7% peak-to-trough decline;
  • MAY/JUN ’11: the looming threat of political unrest ahead of the JUL 3 parliamentary election: -9% peak-to-trough decline; and
  • MAY/JUN ’12: the looming threat of political unrest ahead of a potential court-ordered dissolution of parliament [again]: -9.8% peak-to-trough decline. 

As it relates to what’s currently derailing performance in Thai equities (aside from global growth slowing), a rift has been created between the Thai Constitutional Court and the ruling Pheu Thai Party (which won a 265-seat majority in the aforementioned mid-’11 election). Their beef stems from pending Pheu Thai legislation that would establish a 99-member body tasked with rewriting the constitution, which was drafted by an army-appointed panel after the ’06 military coup which overthrew the government of Thaksin Shinawatra’s – current Thai Prime Minister Yingluck Shinawatra’s elder brother.

There are those (including us) who speculate that the Pheu Thai mostly wants to alter the rules in order to allow Thaksin a return to his homeland free from incarceration (he’s currently living overseas to avoid a 2yr jail sentence) with his personal wealth restored (upon the sentence, the courts seized 46B bhat ($1.5B) of his assets). The court fears any new governing document may violate or eradicate Article 68 of the current constitution, which restricts attempts “to overthrow the democratic regime of government with the King as Head of State”, allowing for judges to disband political parties found in violation of the clause:

“[We] judges want lawmakers to provide a promise to the public in clarifying whether plans to rewrite the constitution will change articles related to the monarchy… This will ensure that the constitutional amendments will not go too far… We need to investigate this to balance the power.”

-Constitutional Court President Wasan Soypisudh

All told, if the Pheu Thai comes out in the coming days and acquiesces to the Constitutional Court’s demands that any changes to the constitution protect the Thai monarchy as well as the court’s own sovereignty and independence as the supreme judiciary body, we think that would remove a great deal negative sentiment currently surrounding Thai equities – especially given the elevated threat of political unrest, which would likely take place in the event the court is forced to disband the very popular Pheu Thai party.

We are not of the view that this infringing upon the Constitutional Court and/or the Thai monarchy is the Pheu Thai’s goal anyway, so we would expect them to play ball, rather than risk severe political instability during the economy’s continued recovery from last year’s devastating floods. Speaking of “continued recovery” our proprietary G/I/P model continues to point to accelerating economic growth in Thailand from a TREND-duration perspective on the back of aggressive minimum wage increases, stimulus spending and other populist policies.

Darius Dale

Senior Analyst

IS THE CORRECTION IN THAI EQUITIES OVER? - THAILAND