Why Thai election shouldn’t derail investment climate

Thailand is set to go to the polls on Sunday, July 3, and the result could have a bearing on the country's investment climate. Since the end of the absolute monarchy in 1932 there have been 18 actual or attempted coups, and only one government has lasted its full four-year term.

The last election was on Dec 23, 2007, and the Peoples Power Party (formerly ‘Thai Rak Thai’) won the most seats, but failed to win a majority. It went on to form a government under prime minister Samak that led to the PAD (“Yellow Shirt”) protest movement shutting down Bangkok’s airport in November 2008.

A week later, the Constitutional Court dissolved the PPP for electoral fraud committed by its deputy leader. The collapse of the party led to a vote for a new prime minister, and after several defections of PPP members, Abhisit Vejjajiva emerged as PM and head of a coalition government in December 2008. He has remained in power since.

Sunday’s election is dominated by the incumbent Democrat party, and the opposition Pheu Thai party, (the successor party to PPP), a party which is still a proxy of Thaksin Shinawatra and is nominally led by his sister, a political novice, Yingluk Shinawatra. There is no ideological difference between the parties, both are in essence right wing, business-friendly power blocs squabbling for who gets their hands on the cheque book.

So how is the election likely to affect the investment climate?

“We’ve maintained our “overweight” view on Thai equities and argue that it's the underlying economy which drives earnings,” says Andrew Yates, the head of foreign equity sales at Asia Plus Securities.

“We believe that Thailand is transitioning from a niche value play to a more mainstream Asian growth market and deserves a re-rating. Regardless of which party wins this weekend. Thailand’s growth will come from higher domestic consumption, a new credit cycle fuelling corporate capital spending and continued government infrastructure spending.”

Initially, consensus among local brokers was for a Democrat-led coalition victory, but this is now in doubt as Yingluk Shinawatra has resonated well with the electorate, and it remains a very close call if the Pheu Thai can even get enough seats for an outright majority. This led to foreign selling and a downwards drift in the index.

“We estimate the SET is approximately 4% to 5% below where we would be if sentiment had not swung towards the opposition,” says Yates. “Given that expectations have now changed, we do not see any significant downside should PT win and form the next government, although there is less chance of any relief rally that would occur should the Democrats win.

"However we believe that the medium-term outlook for most SET-listed stocks will not be affected regardless of the results. Based on last year’s experience (the 2010 red shirt riots) we see no impact on foreign investment and earnings of most companies if political unrest (post-election) from either side occurs."

Thailand’s corporate sector has posted operating profit growth in every calendar year, except one, since the coup in 2006. The only year in which earnings declined was in 2008, mostly due to the global financial crisis.

Uncertainty is something that investors – especially foreign ones – in Thailand have had to deal with for decades, and politics does shape investor perception in the equity market to some extent. There has been a narrow trading range and low turnover in recent weeks. Local retail investors, who traditionally account for well over 60% of trading, have been below 49% for the past week and foreign investors have net sold more than $1billion worth of shares this month.  

The SET index enjoyed a positive start to the year, peaking at 1,113 in late April and then it declined by nearly 10%. It is now down only slightly on the year. The Thai market is up over 28% in the past 12 months, second only to Indonesia in Asia’s stock markets.

AsianInvestor recently met a fund manager in Dubai who had just had a cup of coffee with Thaksin Shinawatra. As Thaksin was grumbling about his Middle East exile, the fund manager suggested that he should buy the Thailand islet in the offshore ‘The World’ development and lord it over that plot, (which, as a property project, is very much a ‘white elephant’ in the Thai sense of the word). Thaksin apparently didn’t think it very funny. So does he want to go back to Thailand for real? Undoubtedly.