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Is the Thailand ETF in Trouble?

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Thailand has emerged as a strong economy among the emerging markets in the past few years. The country was one of the brighter spots in the first half this year when emerging markets have clearly been out of favor for investors.

This is especially true as the iShares MSCI Thailand Capped ETF (THD - Free Report) delivered impressive annual returns of 19.38% (as of June 30) versus 2.06% for the broader iShares MSCI Emerging Markets ETF (EEM) and 0.83% for the Vanguard FTSE Emerging Markets ETF (VWO).

Though this was not enough, the product is a top performing nation from a five-year look with over 113% returns in the same period, suggesting that the country has not only held up well in the market uncertainty but has also been a long-term outperformer.

However, the recent trends indicate that the Thai economy has entered into a mild recession for the first time since global crisis. As such, the Thailand ETF lost about 10% in past two weeks and is down 14.7% in the year-to-date period (read: Avoid These 3 Emerging Market ETFs).

Gloomy Outlook

Like many other developing and emerging countries, Thailand has seen significant downturn of late on weak exports, sluggish domestic demand, struggling currency (the baht) and falling consumer confidence.

Further, the increased prospect of the Fed curbing its monetary stimulus on improving domestic economy led to a broad sell-off in the emerging markets. While India and Indonesia have been worst hit by the concerns, Malaysia and Thailand are also paving the way for the dwindling emerging economies (read: Emerging Market ETFs Tumble on Global Worries). 

The second most populous Southeast Asian economy surprisingly contracted 0.3% in the second quarter against the expected 0.2% growth. This is followed by revised 1.7% decline in the first quarter. Weaker-than-expected growth has compelled central banks to lower the growth projections for the economy.

The central bank of Thailand now projects economy to grow to 4.2% compared to the previous forecast of 5.1%. The central bank left its key rate unchanged at 2.50% during its latest policy meeting as worries over the rising household debt and high credit growth narrowed the prospect for lowering interest rates. The bank had made the last cut in its interest rates by 25 bps in May (read: Thailand ETF Slips on Rate Cut).

In such a gloomy backdrop, the country’s main benchmark has seen double-digit loss over the past few weeks. Furthermore, the nation’s currency, the baht, has also plunged, and is now at a three-year low against the greenback. This trend is likely to continue if the Fed starts tapering and the Thai economy doesn’t improve. 

THD in Focus

The fund tracks the MSCI Thailand IMI 25/50 Index, having amassed nearly $654 million in its asset base. Volume is pretty good at roughly 290,000 shares a day on average, probably ensuring no additional cost beyond the expense ratio of 0.62%. Despite this, the ETF has seen outflows of more than $100 million in the past few weeks (see more in the Zacks ETF Center).

Holding 112 securities in its basket, the fund is somewhat concentrated from both a sector and an individual security perspective. Financials comprise more than one-third of the total assets while energy companies make up another fifth (read: 3 Surging Financial ETFs Beating the Market). Beyond this, materials, telecoms and consumer staples round out the rest of the top five, making up a combined 26.6%.

In terms of holdings, the top three firms – PTT PCL, Advanced Info Service, and Siam Commercial Bank – make up for at least 7% share each. The product has a certain tilt toward the large cap securities as these account for substantial 78% of assets.

Bottom Line

The short-term outlook seems cloudy at present on the back of U.S. economy uncertainty and the slowdown in China that are weighing on Thai exports and its currency. However, the long-term outlook seems bright as THD currently has a Zacks Rank of 2 or ‘Buy’ rating (read all the Asia Pacific Emerging ETFs here).

Despite some recent weakness, the product has outperformed the funds tracking peers like India (INDY - Free Report) and Indonesian (IDX - Free Report) in the past one month. This suggests that cautious investors could take advantage of the recent pull back in the Thai ETF this year.  

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