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Investors in Thailand Wait for Yellow or Red Light

Thailand analysts and investors are waiting to see if the country’s May 22 coup is a signal of an economic turnaround.

The clock is ticking on Thailand’s new military government as investors await a clear timetable for return to civilian rule following the departure of Prime Minister Yingluck Shinawatra.

Since the military’s May 20 declaration of martial law and its announcement two days later that it had taken over the government in a coup, capital has been flowing out of the country with increasing momentum. Sell-offs by foreign investors on the Stock Exchange of Thailand (SET) totaled 16.5 billion baht ($509 million) on May 23, a sharp acceleration of the recent trend. During the first four months of 2014, net outflows totaled 5 billion baht. Foreigners sold a total of 35.8 billion baht worth of Thai stocks in May, most of it since the coup, and 40.7 billion baht since the start of the year. On May 30 alone, according to numbers from SET, total net foreign pullout was 2.17 billion baht.

“Now, with the coup, foreign investors, who were already underweight, are likely to be even more cautious about Thailand,” says Kasem Prunratanamala, head of research with CIMB Securities in Bangkok. “With the military government, there’s even less reason for foreign investors to be here.”

The country’s political turbulence had been taking an economic toll even before the coup. Thailand’s GDP was down 0.6 percent in the first quarter compared with the same period a year earlier. Exports and consumer confidence have also fallen. Meanwhile, the Thai baht has been one of the worst performers in Asia; it has dropped by 7.9 percent against the dollar over the past 12 months, to 32.71 to the dollar on May 30. Key sectors such as tourism have been hit hard by political instability, which has occasionally erupted in violent clashes between supporters of now-former prime minister Yingluck Shinawatra and antigovernment protesters. Banks too have been damaged by the crisis, which has led to more nonperforming loans as the economy goes into retreat.

Yet even if international investors seem worried by the coup, many in Thailand’s financial community have welcomed the military intervention for potentially drawing a line under this tailspin. After all, this was the 12th time the military has seized power in the past eight decades. “Everyone is pleased there has been military action to end the political stalemate,” says Dol Watanasri, securities country manager at Citigroup in Bangkok.

Indeed, some are confident that the initial shakiness in the markets will resolve itself soon and give way to stability in the long term. “While foreign net sells have been sizable, various asset management companies have shared the view with us that this is short term only, and they are expecting to return if the SET index [SETI] falls further to a more comfortable level,” says Sasikorn Charoensuwan, head of research at Phillip Securities in Bangkok. He says the firm is looking at an entry level of about 1,340 to 1,350 points on the SETI as the base case and, in the worst case, about 1,260 points. The index rose 7.22 points, to 1,415.73, on May 30. It was the fourth straight day of modest gains and left the index slightly above its precoup level, and up 9 percent since the start of the year.

A return of foreign investment will likely depend on the military’s getting the economic and political equation right — and quickly.

The urgency is there. Previous bouts of military rule did not leave a positive impression with investors. “After the last coup, in 2006, the military were weak performers on the economy. This left a bad taste in investors’ mouths,” says CIMB’s Prunratanamala. Since taking power last week, however, junta chief General Prayuth Chan-ocha has declared he will take a different approach.

“Unlike the previous coup, economic issues have been put on the junta chief’s priority list, and thus confidence should be regained in a short time,” says Charoensuwan.

One positive sign is that the military rulers haven’t imposed capital controls, something that foreign investors had feared. “Such things are highly unlikely,” says Prunratanamala. “The central bank has experience of this from the 2006 coup, when the military introduced these and the SETI fell dramatically.”

Meanwhile, there may be some bargains to be had for those willing to risk a strategic play. “Looking at the big-cap stocks,” says Watanasri, “many are now quite interesting.”

Some blue chips are potentially undervalued, with plays in basic consumer sectors, such as telecoms and health, and in stocks linked to global recovery, such as energy and food, widely recommended. A May 26 note from CIMB shows Total Access Communication Public Co., also known as DTAC, was at 121 baht as of market close May 29, exactly where it was a month ago and slightly down from a precoup, May 22 close at 123.50. Health company Mega Lifesciences closed at 21.80 baht on May 29, down a little from its 22.10 close on April 29, but up from 21.30 on May 23.

Whereas short-term bonds have taken a beating, long-term ones have generally stayed healthy. According to statistics from Bloomberg, yields on five-year bonds went up 7 basis points between April 30 and May 27. Ten-year bonds show a different trend, however: According to Bloomberg, on May 23, the day after the coup, yield was down 1 basis point, to 3.78 percent; as of May 30, it’s at 3.73 percent.

Yet uncertainty remains about the political risks.

In Bangkok and elsewhere, there were widespread demonstrations against military rule over the weekend of May 24 and 25. A large question mark lingers over what supporters of the ousted government may do next. Shinawatra’s administration was the latest in a string of governments associated with her brother, the populist former prime minister Thaksin Shinawatra. With a core of supporters known as the Red Shirts, the Shinawatras have been consistently victorious at the ballot box in recent years. They have a major support base in rural areas, particularly the northwest, as well as the poorer districts of Bangkok.

“There is a danger of the Red Shirts protesting,” says Watanasri, “and of underground activities breaking out. At this point, we haven’t heard anything, but we are all waiting to see what they will do; it’s also why the curfew is now countrywide.” The military has so far met protests with a tough response, banning gatherings of more than five people while also detaining Red Shirt leaders and suspected sympathizers within the police and army. It also detained — then reportedly released — Yingluck Shinawatra and many of her cabinet colleagues. Several journalists have also been taken into custody. This has strengthened international calls for sanctions. The U.S. is mulling whether or not to draw back its military aid and other funds to Thailand.

Indeed, U.S. Secretary of State John Kerry has said he is “reviewing” military and other assistance the U.S. gives to Thailand. Yet few in Bangkok expect any serious international economic or financial sanctions against the country. “I don’t think we’ll see anything strong,” says Watanasri. “We’re not Ukraine. It is a coup, but the military was very much a last resort.” What many investors are asking, however, is how long the military will stay in office and how effective the generals will be in instituting measures that might get the country back on track. “The military needs to enact reforms, first of all. Then they need to move to an election,” says Watanasri. “Otherwise, it begins to look like the military wants to stay in power rather than just break the political deadlock.”

Thailand’s 2006 coup was followed by 18 months of military rule. Prunratanamala thinks that this time around, the military could keep control longer. “Last time, they failed to deal with the Red Shirts. Some think it might be shorter, though, with an election late this year, but I think that would be extraordinary.”

In the meantime, says Watanasri, “we are all awaiting new announcements.”

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