25 augustus 2011
Healthy growth set to continue in ThailandStock exchanges in South-East Asia have been the top performers in the last 12 months

Mark Monson, ASEAN-expert in the team Emerging Markets Equities at Raiffeisen Capital Management

During recent weeks, stock markets around the world have come under intense pressure, but the exchanges in Thailand, Indonesia and the Philippines have held up amazingly well, realising some of the best performances on a global level year to date (Thailand: 1.9%, Philippines: 3.4%, Indonesia 4.3%). The robust performance of these markets can be traced back to the steady growth in domestic demand, as this so far has been able to help compensate for declines in exports, as global demand slows. Furthermore, the rising demand for consumer goods is likely to remain in place for the years to come. Wage growth and sustained optimism about the economy growth are two of the main factors behind this development. Thailand in particular has also been profiting from the outsourcing of production by many Japanese firms.

For more than 20 years now, Japanese companies have been taking advantage of the cheaper production costs in Thailand, which has a good reputation for high production quality. This trend has grown even stronger since the earthquake in Japan, as many successful Japanese companies now also see security of supply aspects as another argument for relocating their production facilities. Although growth in Thailand did slow down slightly to 2.6% in the second quarter (mainly due to supply disruptions arising from the Japanese earthquake), we already expect to see more robust growth in the third quarter. Strong corporate and government fundamentals, high productivity, a flourishing agricultural sector (as food prices are on the rise), tourism and growing domestic consumption suggest that Thailand’s economy will bounce back rapidly.

These supporting factors may result in Thailand’s economy reaching growth rates of 4.0%-4.5% again in the second half of the year. This outlook is also reflected in the developments on the equity markets. Corporate earnings are rising quickly and prospects for future earnings are also still being revised upwards. So far first half earnings posted growth between 15% and 20% and there are numerous indicators suggesting that this trend may be sustainable for some time. At the same time, the earnings dynamics of Thai firms is still frequently underestimated.

Another positive point for investors is the relatively liquid, broad-based equity market with in the emerging ASEAN space. Compared to its peers, the Thai stock market gives one exposure to a wide breadth of the Thai economy. Even though the valuations of the Thai market are not as attractive as they were last year, they still offer respectable valuations relative to its longer term growth potential.  Raiffeisen Capital Management currently prefers consumer-oriented companies, selected financials and industrial estates. While set-backs are possible at any time over the short run, over the long term there is still potential for growth in the years ahead.