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Thai stocks gain, as draft constitution is approved - MarketWatch

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EMERGING MARKETS REPORT

Thai stocks gain, as draft constitution is approved

Analysts cautiously optimistic, say Thailand offers value, but political risk remains

Last Update: 2:04 PM ET Jul 6, 2007

NEW YORK (MarketWatch) -- Thai stocks posted strong gains Friday, as a military-appointed commission approved the final draft of a new constitution, bringing Thailand a step closer to clearing the political uncertainty that has clouded investor sentiment since last September's military coup.

In Bangkok, the Stock Exchange of Thailand (SET) composite index closed up 1% at 832.38 points on Friday. It has gained 22% this year.

"Having progress on the constitution is good news, but the story is not over yet," said David Riedel, president of the Riedel Research Group. "This approval is just of a draft and it needs to go to a referendum in August where it could still be rejected."

In June, the MSCI Thailand index rose 4.8%, underperforming the regional MSCI Emerging Markets Asia index by about one percentage point.

"The perception is very cautious optimism," said Cameron Brandt, global markets analyst at EPFR Global from Emerging Portfolio Fund Research.

"The last period of aggressive outflows from Thailand country funds really came to an end in mid-May and since then we've seen modest but pretty steady flows into those funds," he said.

The weight of the top 5 stocks in the SET index is 36.3%. Thailand's top weight PTT PCL has had year-to-date returns of 32.4%, according to data from the Riedel Research Group.

PTT is Thailand's only fully-integrated gas company. Through its subsidiary PTT Exploration and Production (PTTEP), it is also involved in the exploration, development and production of natural gas, condensate and crude oil.

Besides PTT, the other stocks in the SET's top five are PTTEP with returns of 14% this year; Siam Cement with returns of 9.1%; Advanced Info Service, the country's largest cellular operator, with returns of 12.9%; and Bangkok Bank with returns of 9.1%.

"Thailand does represent one of the few pockets of potential value in the Asian equity markets," Brandt said. Thailand's price/earnings ratios are 16%-17% those of the hotter markets, such as India and Korea.

"People with a stronger appetite for risk are starting to move in, because it won't take much positive news to substantially improve the Thailand story," Brandt said.

"If the elections go reasonably smoothly and a coherent government emerges, which can really implement these big infrastructure projects, then domestic demand and the willingness of local businesses to invest will change for the better," he said.

The external environment for Thailand also remains very supportive given the strong demand for its raw materials, he said. The country's main exports include food particularly rice, seafood and live animals, office equipment, textiles and clothing, and rubber.

Investors in Thailand have had a bumpy ride this year. In late December, Thailand's central bank introduced restrictions on foreign investments, triggering a hemorrhage in Thailand's equity markets, with the SET index tumbling 15% in one session. Capital controls have since been scrapped, but confidence is far from restored. Read more.
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Political uncertainty is the "dominant" risk in Thailand, Brandt said.

"Most of the other risks stem from that," he said. "The central bank's brief foray into capital controls didn't help things, but again that was also political. People have concerns that with a more authoritarian government, the independence of the central bank is now open to question."

Draft constitution approved, referendum ahead

In a confidence-boosting move Friday, a military-appointed commission approved a new draft constitution.

"It's positive because it maintains the expectation that Thailand will transition to civilian government some time either later this year or early next year," said Roberto Herrera-Lim, analyst at the Eurasia Group.