Thailand is cheap – but it’s not time to buy

Thailand is probably the cheapest market in emerging Asia. The SET index trades on a p/e ratio of just 12.8 times this year’s expected earnings, even after a near 60% rally this year. So does that make it a buy? No.

The political situation there remains appalling. The coalition took over last December after a democratically elected government was forced out by politicised courts, and the army refused to act against protestors that were paralysing the country. That administration is still in power.

But it says everything that many of the crucial figures involved in this weekend’s discussions about fixing the country’s disastrous constitution are technically banned from politics.

Thailand is not a functioning democracy. It’s a motley crew of different interests – the royals, the army, businessmen, key provincial politicians, the judiciary – conniving behind the scenes. That wouldn’t be a problem – democracy isn’t necessary for development – if most of them were pulling in the same directions. But they’re not.

To take just one example, last week, a court ordered Bt400bn ($12bn) of oil and petrochemicals projects to be halted on environmental grounds, even though the plans follow government guidelines. The projects are big enough to have an impact on growth by themselves – but the real problem is that if this ruling is upheld, it risks scaring off future investment plans by Thai and foreign firms. Who wants to invest in a country where even those who make the rules don’t seem to have a grip on what they are?

Until Thailand has a functioning government that makes decisions and pushes through policies, the market is likely to remain a value trap. It’s the kind of situation that tempts you to keep adding to your position because it looks so much cheaper compared with anywhere else. One fund has done just that: Templeton’s Asian Growth Fund has 25% of its assets in Thailand, a market that accounts for just 2.5% of emerging Asia’s GDP in purchasing power parity terms.

If Thailand starts to fix its problems, overweighting could look a very smart call. But that might be years away. In the meantime, both the economy and the market risk being left behind by better-run neighbours.

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