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Takeaway: Price signals and reversal of sentiment are two factors that may converge to help perpetuate a further breakdown in Thai equities.

SUMMARY BULLETS:

  • If you’re looking to reduce you’re international equity exposure from here, Thailand may be a good place to start as price signals and reversal of sentiment are two factors that may converge to perpetuate a further breakdown in Thai equities.
  • While there’s not necessarily a high-conviction short call to be made here (the slowdown in growth from the flood comp-related acceleration in 4Q is both obvious and expected) we are monitoring the SET closely here to see if it holds or breaks down below our intermediate-term TREND line; the immediate-term TRADE line was violated to the downside just yesterday (inside baseball on the margin hike or a mere coincidence?).
  • Needless to say, a confirmed TREND-line breakdown would be a clear signal for investors to dramatically reduce their Thai equity exposure. Punitive capital controls and a dramatic acceleration of political instability are two proactively predictable negative fundamental outcomes that would likely take consensus by surprise, potentially perpetuating a noteworthy reversal of international capital flows.

The Stock Exchange of Thailand announced today an increase of the cash-account rule for securities trading by brokers to 20% of a customers’ credit line, which weighed heavily on the overall SET Index (down -3.3% on the day and -7.5% wk/wk). While we expect declines specifically related to this margin hike to be short-lived, the broader question of “where to from here?” is begged by the SET’s negative delta from previously outperforming the region to now underperforming the region.

In our Asia+LatAm universe, the SET is the third-best performing index on a YoY basis at +24.2% and the second-worst performer on a MoM basis at -4%.

TIME TO BOOK GAINS IN THAILAND? - 1

 

TIME TO BOOK GAINS IN THAILAND? - 2

One has to wonder if all the good news (slowing, but very robust growth, slowing inflation and reasonably insulated from JPY debauchery as Japan is Thailand’s largest source market at 18.4% of imports and 64% of FDI) is priced in. The THB is outperforming (i.e. either #1 or #2) on all three of our core Asia+LatAm factor risk durations: +1.9% MoM, +4.5% over 3M and +5.1% YoY, indicating a high degree of foreign capital inflows.

TIME TO BOOK GAINS IN THAILAND? - 3

 

TIME TO BOOK GAINS IN THAILAND? - 4

 

TIME TO BOOK GAINS IN THAILAND? - 5

Evidence of froth are indeed present, even as the fundamental underpinnings for further upside in Thai financial markets appears to be abating: 1M 25-delta risk reversals for the USD/THB are at -14bps, which is the lowest since mid-2008 and equity market valuations, while not dramatically overstretched, are definitely at the high ends of their respective ranges; meanwhile, Thailand’s 10Y-2Y sovereign yield spread (a key proxy for growth expectations) has pancaked in recent months.

TIME TO BOOK GAINS IN THAILAND? - 6

 

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TIME TO BOOK GAINS IN THAILAND? - 8

While there’s not necessarily a high-conviction short call to be made here (the slowdown in growth from the flood comp-related acceleration in 4Q is both obvious and expected) we are monitoring the SET closely here to see if it holds or breaks down below our intermediate-term TREND line; the immediate-term TRADE line was violated to the downside just yesterday (inside baseball on the margin hike or a mere coincidence?). Needless to say, a confirmed TREND-line breakdown would be a clear signal for investors to dramatically reduce their Thai equity exposure.

TIME TO BOOK GAINS IN THAILAND? - THAILAND

 

TIME TO BOOK GAINS IN THAILAND? - Thailand SET

Punitive capital controls, while not a near-term risk per the latest commentary out of both Finance Minister Kittiratt Na-Ranong and Bank of Thailand Governor Prasarn Trairatvorakul, could eventually be implemented if the Thai baht remains on fire. Specifically, the JAN minimum wage hike to 300 baht/day may start to weigh on the competitiveness of Thailand’s export sector (57.6% of GDP), which would increase corporate pressure upon the now heavily-scrutinized Shinawatra administration to act.

In regards to the aforementioned scrutiny, it should be noted that Prime Minster Yingluck Shinawatra is facing legal pressure for misrepresentation of familial assets and for issuing her brother, former Thai Prime Minster Thaksin Shinawatra (currently a wanted fugitive in Thailand that lives abroad to evade prosecution), a fresh Thai passport.

Her ethics are being questioned by rival parties and a full investigation by the Ombudsman’s Office is not out of the question. A revocation of her ruling mandate is a key tail risk to consider – especially given Thailand’s well-documented recent history of political instability. Recall that consternation on the political front weighed heavily on the SET Index in the Springs of 2010, 2011 and 2012 (full disclosure: we held a bearish bias heading into the 2011 correction and reinitiated appropriately bullish at the bottom the 2012 one).

All told, if you’re looking to reduce you’re international equity exposure from here, Thailand may be a good place to start as price signals and reversal of sentiment are two factors that may converge to help perpetuate a further breakdown in Thai equities. Watch that TREND line closely!

Have a great weekend,

Darius Dale

Senior Analyst