Investors in Thailand and Vietnam must expect a bumpy ride

Political turmoil can be a buying opportunity. But that doesn't mean investors should now be eyeing up Thailand, where the market has slumped to its lowest level since February last year and is trading on a pe ratio of ten and yielding just over 5%. Upheaval is a buying signal if a resolution is within sight, says Credit Suisse. Here, it isn't.

Violent clashes between government supporters and opponents prompted the government to declare a state of emergency last week. The protesters insist that the government bought the votes of the poor and want a parliament appointed largely by the military. Now the constitutional court has ordered prime minister Samak Sundaravej to resign after ruling that he had breached conflict-of-interest rules by making paid appearances on a television cooking show. The governing coalition has been meeting to decide on his successor. As analyst Marc Faber puts it, Thailand is "a political mess" and the ongoing stalemate between government and opposition forces seems set to continue.

Moreover, with the world economy already wobbling, political uncertainty is undermining foreign investment, which comprises over 3% of GDP. Growth is already expected to slide to under 5% in 2008, down from 6% in the first quarter. Given all this, Thailand remains a "value trap", says Christopher Wood of CLSA.

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Meanwhile, southeast Asia's worst-performing market in 2008, Vietnam, has bounced over the past few weeks. It's gained 19% in August alone and is now 50% up on its June low. Lower petrol prices following oil's decline and wider daily trading limits on the stockmarket have improved sentiment, with retail investors the key drivers of the market returning to stocks. The main reason confidence has grown is that inflation appears to be peaking and the trade deficit has improved, allaying fears of overheating and a currency crisis.

Consumer prices rose by 1.6% month-on-month in August (compared to 4% in May) and the annual rate looks set to peak at 30% in September, reckons Dragon Capital.

On the trade front, both July and August saw a monthly trade deficit below $1bn as import growth lessened. Policy "seems to be heading in the right direction, with monetary policy and state spending tightened", says Sherman Chan of Moody's. Currency investors have delivered a vote of confidence, with the dong strengthening against the dollar over the past few weeks, notes DBS Research. Moreover, the depreciation in the dong over the next 12 months implied by the forward market has fallen from 33% to around 12%.

But is it too early to sound the all-clear? An interest-rate cut by the central bank last week would have confirmed that it thinks the economy has stabilised, but it clearly remains "cautious", as it kept rates on hold, says Huynh Anh Tuan of SJC Securities. Weaker commodity prices and global demand look set to crimp export growth. FAZ.net notes that the fight against inflation could reduce growth to 6%-7% this year, compared to an initial government estimate of 8.5%, and earnings forecasts for next year may prove too optimistic. Vietnam's economic ascendancy looks "unstoppable", given its potential, says FAZ.net, but there could be further disappointments in the near future. Expect a bumpy ride.