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Thailand ETF in Focus on Escalating Protests

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It seems that the two-month long heated Thai-protests will cripple the country’s near term outlook. In any case, emerging markets like Thailand will likely remain out of favor in 2014 thanks to the possible end of the cheap dollar following the Fed’s QE Taper.  Only a country with inherent strength can endure the broader emerging market volatility this year.

Though Thailand was relatively better placed in the emerging market pack mainly because of considerable infrastructure spending, mounting political tension makes the attainment of 3% economic growth this year uncertain.

Thailand's Fiscal Policy Office (FPO) cut its GDP forecast twice in 2013 – once in November to 3.0% from 3.7% reflecting sagging exports and once before in July from 4.2% to 3.7% (read: 3 Emerging Market ETFs to Watch for Political Issues in 2014).

As per the University of Thai Chamber of Commerce, the current political uproar would cost Thailand "economic loss of approximately 20 billion Thai baht ($604.6 million)". Given this loss, and the prospect for volatility ahead, many investors are turning bearish on Thailand lately.

What Happened in Thailand?

The protest is basically intended to expel Prime Minister Ms Yingluck Shinawatra’s administration – built on the political structure of former Prime Minister Thaksin Shinawatra. The rallies are in protest of an amnesty for transgressions dating back to the 2006 rebellion that expelled former premier, Thaksin Shinawatra, the brother of the current Prime Minister. The protest took the shape of a drive to end the sufferings under Thaksin Rule.

The protests were small at first mainly resorting to rallies, but quickly flared up. Sometimes protesters went on to seize sensitive areas like police headquarters and TV stations resulting in injuries and even death.
In December, Prime Minister Yingluck Shinawatra tried to cool off the agitation by dissolving the country's parliament, and then calling for snap elections scheduled for February 2.

But the unrest intensified in January thanks to a futile attempt by the current government to pass a bill that would pardon several figures from the recent past including the former Prime Minister Thaksin Shinawatra so that he can return to the country from exile.

Thaksin – a controversial ruler of the country from 2001 until 2006, was overthrown by the military in a bloodless coup after being convicted as a corrupt politician.

If this was not enough, there are also reports that Thailand’s Democrat Party will boycott the upcoming elections in association with the protest which seeks an electoral reform, pouring cold water on Thailand’s plans for a resolution. Protesters now aim to ‘shut down’ the capital city, Bangkok, adding even more turbulence in the nation’s economic center.

To put an end to this revolt, some believe that Yingluck might go to the extent of declaring a state of emergency, hinting at little room for any compromise. This long-stretched protest is hurting government spending and the all-important Thai tourism industry (contributed 7% of the country’s GDP). In fact, twenty-three countries issued warnings against visiting Thailand amid the turmoil.

Market Impact

Quite expectedly, the market has punished Thailand for these political issues. Thailand's benchmark stock index tumbled more than 12% in the last one month. The Thai baht has nosedived to multi-year lows, losing almost 6% against the U.S. dollar since the start of the political strife.

Despite a modest revival in most developed nations, exports remained weak thanks mainly to the persistent slowdown in its biggest trading partner China (read: China ETFs Tumble to Start 2014).

While broad emerging market funds like iShares MSCI Emerging Markets ETF (EEM ) and Vanguard FTSE Emerging Markets ETF (VWO ) lost 6.05% and 5.78%, respectively, in the last two months, iShares MSCI Thailand Capped ETF (THD) shed 17.5%.

Thailand ETF in Focus
THD is the only Thailand specific ETF, and it tracks the MSCI Thailand IMI 25/50 Index. The ETF has seen sizeable asset outflow in the last one month and presently has about $551.0 million under management.

Holding 123 securities in its basket, the fund is concentrated in the top 10 holdings which account for as much as about half of the total. The ETF charges a reasonable 61 bps in annual fees.
The fund is heavily exposed to financials that make up for 35% of the share in the basket followed by the energy (18%) and material (10%) sectors (see more in the Zacks ETF Center). Though the fund provides exposure to all caps, it puts more focus on large caps. THD lost 15% in 2013.

Bottom Line

It is hard to predict the near term outlook for Thailand ETF at this time. There is a high chance of further losses should the protest escalate.

Still, over the long term, Thailand looks promising given a very low unemployment rate, contained inflation and still-stable financial condition. Export profile which was weak all through 2013, might turn around in 2014 as per the World Bank (read: 7 ETFs to Buy in 2014).

Needless to mention, the countries latent potential will reach fruition only when the political upheaval cools off. THD presents an interesting value at this time making it an intriguing option for long-term investors who have a strong stomach for risks.

However, the near term might be bleak for the country, especially if protests continue to escalate. Keep in mind though that Thailand has a history of coups, and the nation has persevered through these issues before, so this latest round of political fighting might not be as devastating as what many are predicting, though the near term could be quite uncertain.

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