Thailand Market: A Blend of Growth and Value

The Kingdom of Thailand represents well under 1% of world market capitalization, which makes it an easy market to overlook. This article reviews the country and the opportunities for the iShares MSCI Thailand ETF (ticker: THD).

Emerging Markets are Different Markets

Most investable countries are broadly grouped as either “developed” or “emerging”, along with a much smaller area of “frontier”. When most people think of emerging markets, they think of the broad basket of countries grouped by MSCI together into the EM basket.

In reality, many of these couldn’t be more different than each other. Thailand has little in common with Russia, for example. And yet when pundits and analysts discuss emerging markets, they are often spoken of as though they are one big group with similar outcomes.

Thailand Overview

Thailand is a growing southeast Asian nation with nominal per-capita GDP a bit below China and Malaysia, but well above most others in the region including Vietnam, Indonesia, and the Philippines. They have moderate growth and a diverse economy that flourishes on tourism and exports. About 60% of their exports to go Asia, and the other 40% is spread out worldwide. Only about 13% of their exports go to the United States. 

A unique cultural feature of Thailand is that it’s the only developed or emerging market that is majority Buddhist. Over 90% of the country identifies as Buddhist, compared to under 40% for Japan and Singapore, and about 20% or below for South Korea, Vietnam, Malaysia, and China.

Data Sources: IMF, BIS, World Bank, CIA World Factbook, TradingEconomics.com, Transparency International, Institute for Economics and Peace

The country has higher growth than developed markets, but not as blazing-fast as India or Indonesia. Its demographics are better than most developed countries and China, but not as ideal as India or Vietnam. It has similar levels of corruption and instability to other emerging markets. Debt is relatively low across government, corporations, and households.

The market as represented by the THD ETF is one of the most diversified among emerging markets, with 19% exposure to energy, 18% to financials, 13% to consumer staples, 11% to industrials, and so on. A big flaw is that it has less than 1% exposure to information technology.

The P/E ratio for the MSCI Thailand index is 16x, its P/B is 2x, and its dividend yield is about 2.9%. Its CAPE ratio is 18, which is right in line with its long-term median. Its market-capitalization-to-GDP ratio is near historic highs, but still at reasonable levels considering its significant export exposure:

Data Source: World Bank and MSCI

Thailand has been among the world’s best-performing markets over the past 15-20 years in dollar terms:

Image Source: MSCI

One measure I always like to check for markets is their trend on infant mortality. It’s one of the clearest metrics into per-capita wellness. Thailand’s infant mortality rate has gone from 3x higher than the United States in 1990 to less than 1.5x higher today, indicating increasing prosperity and improving healthcare.

Thailand’s Surprising Currency Strength

One of the biggest differences that Thailand has compared to the rest of the EM grouping is that its currency is highly fortified. It’s one of the strongest EM currencies and actually rivals a lot of developed market currencies in terms of low volatility and high fundamental strength.

Emerging markets often have volatile currencies, so their governments and companies often borrow in dollars. When the dollar strengthens relative to their local currencies, this can cause a currency crisis. It’s a vicious cycle.

Thailand was the epicenter of the 1997 Asian Financial Crisis, where the Thai baht was unpegged and devalued due to insufficient reserves and other factors. Since then, the pendulum has swung far the other way to avoid that type of crisis ever happening again, and now Thailand has one of the strongest emerging market currencies.

In addition to having a positive current account balance, their ratio of foreign-exchange reserves to GDP is 47%, which is one of the highest in the world and larger in size than their total external debt. As a result, there tends to be very limited fluctuation between the U.S. dollar and the Thai baht.

Key Risk- Questionable Stability

Thailand has a unique blend of stability and instability.

Instability exists from a century of political turmoil. There are three main power sources in Thailand: the king, the military, and the elected government. The military has overthrown the elected government on multiple occasions for various reasons with little or no bloodshed in most cases.

The first elections after the 2014 coup were held recently in 2019 and the results are still being contested. The Thai commander that staged the coup is currently the prime minister and is one of the leading candidates in the recent election. 

On the other end of that spectrum of discontinuity, the previous king reigned for literally 70 years and was very popular in the country, and his son has now been king since 2016, although his official coronation was recent. Insulting the king in Thailand can land a person in prison for years or decades, and this law has been enforced more aggressively since the 2014 coup under military rule.

On the other hand, the general culture is welcoming and hardworking, and all main sources of power understand that tourism is important for the country. Thailand is the tenth most visited country in the world, but out of those top ten Thailand has by far the smallest economy, so tourism as a percentage of GDP is a big deal.

Final Thoughts 

Research Affiliates estimates that Thailand will return about 7.6% annually over the long-term with moderate volatility: 

Image Source: Research Affiliates

This is considerably higher than their estimate for U.S. equity returns, but lower than their estimate for some of the deep value and higher-risk countries like Russia and Turkey. There is a bell-curve of probabilities around their estimate. 

I traveled to Thailand for nearly a month-long vacation in late 2017. I visit a new country every year or two and Thailand was one of my favorites. The hustle and bustle were great, the people were friendly, and U.S. dollars go a very long way in the country. Just watch out for the not-infrequent motorcycle on the sidewalk. 

Thailand ranks within the top third of countries on my country scoreboard based on a blend of decent economic growth, moderate equity value (neither overvalued or cheap), strong currency fundamentals, and low debt, which is then partially offset by high political instability and low technology exposure.

If Thailand can avoid some of big tail risks inherent with such instability, then the country likely has a long runway of growth ahead as it continues to increase per-capita prosperity as well as overall population levels. I'm long THD for a small portion of my portfolio and will re-balance into it on dips.