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Thailand: Referendum Results and Fiscal Policy Support Green Shoots

Global Equity Team Perspectives by Nick Niziolek, CFA

We recently launched our series of posts on how economic freedoms support investment opportunity. In our first post on India, we noted that our team sees considerable value in identifying, understanding and investing in positive inflection points created by economic reforms.

In this post, we’ll take a look at Thailand, where we are seeing steps toward political and economic reform. Thailand illustrates an important nuance of our process: We consider not only the overall level of economic freedoms in a country but also the direction the country is moving in—that is, is it becoming more or less free?

Although Thailand has a distance to go in terms of achieving high absolute levels of freedoms and reforms, we are seeing fledgling signs of inflection points. Since a military coup in 2014, Thailand has been governed by a military junta called the National Council for Peace and Order (NCPO). In an early August referendum, voters accepted a draft constitution and the upcoming election of a prime minister by Thailand’s National Assembly.

The referendum paves the way for general elections in 2017, as well as for the continued development of a new constitution over a five-year transitional period. Certainly, the military will exert considerable power over the government, but the outcome of the referendum creates a degree of relative stability that can bolster confidence and pave the way for much-needed increases in private and foreign investment, as well as fund flows. With a road map in place, the country is better positioned to address structural issues and to achieve a higher and more sustainable GDP growth rate.

In addition to the tailwinds that the referendum may provide, the NCPO has enacted a variety of fiscal policies focused on infrastructure buildout and urbanization. These include a double-track railway link between Thailand and China, which can enhance trade and improve competiveness, and the buildout of rapid transit lines within Thailand. The government has also focused on a more targeted distribution of wealth to farmers and low income rural earners. Health, transport, natural resources and agriculture sectors have benefited from these policies. Consumer expenditure growth continues to exceed GDP growth on the back of these efforts, as well.

We are watching events in Thailand with considerable interest. Clearly, Thailand is not as far along the reform trajectory as many other countries, but based on the improvements we are seeing, our investment team has identified select opportunities—with a particular emphasis on high-quality fundamentals. These include:

  • A leading credit card and personal loan provider. Significant ownership from a state-owned enterprise parent bank provides solid backing, while a focus on consumer finance provides exposure to strengthening consumer trends. We see a potential structural opportunity as well, given the current low penetration rates of personal loans and credit cards in Thailand.

  • One of the largest banks in Thailand, regarded by many as the country’s highest quality banking franchise. With commercial banking, insurance, investment banking, and treasury functions, this well-capitalized bank provides high-quality exposure to the improving economic developments throughout Thailand. A strong fee-income business and historically prudent loan growth have contributed to strong returns on equity.

  • The owner/operator of convenience stores throughout Thailand with dominant market share. This franchise has already benefited from favorable consumer trends, such as increased farmer incomes and has launched a variety of initiatives to support growth. Over the short term, we see further tailwinds from a positive consumer spending mood following the referendum, while the country’s urbanization efforts can provide a long-term growth platform.

Conclusion
Every emerging market reflects a unique set of economic and political conditions, with different reform and growth trajectories. Thailand is in a transition period, which calls for added attention to risk management and company fundamentals. Still, signs of progress suggest that the country may be approaching an inflection point that creates increased investment opportunity.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

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