SEATTLE, Feb. 18 (UPI) -- Thailand's equity market has outperformed most in the world this year, a classic re-election bull run abetted by the inflow of regional disaster relief and a crackdown on Islamic terrorists and rebels. (See "Tsunami Investing," January 6, 2005.) But with prices up nearly 20 percent in dollar terms early in the year -- the market has since pulled back a bit -- and the landslide victory of Prime Minister Thaksin Shinawatra now an accomplished fact, some investors wonder how much higher the tide can rise.
Fundamentals are unspectacular but sound. Thai stocks actually declined modestly in 2004, after a strong 2003, but are thus, even after a brisk January, just returning to pre-election levels. Price-earnings multiples are inexpensive for a middle-income economy, less than 15 times trailing earnings, and with Thai growth averaging close to 6 percent under Thaksin, there's room for upside.
The real key for the Thai economy, and thus the stock market, is political.
Thaksin's Thai Rak Thai party swept 376 seats last month, compared to 248 in 2001 -- out of a total of 500. The opposition Democratic Party struggled to a total of 96 seats, a decline from 128 in the last election, while Chart Thai, which supports Thaksin but is now no longer a necessary part of his coalition, limped home with 26 seats, down from 41.
And why not? Economic growth, a still-anemic 2 percent in 2001, years after the collapse of the Thai baht, has surged into the 5-7 percent range since. The number of non-performing loans in the banking system ticked up in recent months, but still registered a decline to less than 15 percent from more than 50 percent. The public debt, 54 percent of GDP in 2001, is now less than 40 percent. Fewer than one in ten Thais live below the poverty line, compared to more than 14 percent when Thaksin took office.
Thaksin has proven a competent commander-in-chief as well. Military and police raids on drug cartels and guerillas in the south in his first term raised human-rights concerns, but his measures against violent opposition evidently was popular among Thai voters. Micro-credit schemes helped produce a surge in small businesses and township finances for capital projects.
Indeed, it may be precisely in Thaksin's success that the rub lies. It is possible, especially in emerging markets, for a charismatic leader, or party machine, to "do too well" that it comes to dominate the landscape, wiping out future competition.
Consider Mexico, the Philippines, and Argentina, from the 1920s into the 1980s, or, more recently, the mop-the-floor win of Vladimir Putin in Russia.
Thai Rak Thai's huge majority is abetted, in the regard, by other trends in Thailand. A weakening free press is one -- and what is more, the ownership of Thai newspapers and television stations appears to be concentrating increasingly in the hands of Shin Corporation and other firms owned either by family members of Mr. Thaksin, or of his top aides and associates. A second is the growth of some of the very credit programs and other goodies Mr. Thaksin pioneered in his first term, programs that could easily be abused by party hacks. Yet another are such constitutional provisions as a minimum 100-vote requirement to even force discussion of censuring a minister, or a clause which outlaws party changes close to an election (the timing of which is determined, of course, by Mr. Thaksin.)
The potential for abuse, of course, doesn't make abuse inevitable. Then again, to paraphrase Groucho Marx, temptation is one of the hardest things to resist.
Thai democracy, as The Economist put it in a characteristically astute analysis on Feb. 5, "will not be mature until it embraces the orderly rotation of coherent governments." Fair enough, but actually, Thailand has made substantial progress towards just that goal. Unlike the other examples of one-party rule cited above, Thailand has been victim, if anything, to a too-frequent rotation of governments, albeit few of them "coherent."
Mr. Thaksin's government is the first to serve a full term in the country's democratic history, and Thai Rak Thai the first party to gain an absolute majority. Thailand seems much closer, in political and economic development, to Korea, Taiwan, and even Japan than it is to such neighbors as Indonesia, Malaysia, Laos, or Cambodia.
BOTTOM LINE
What matters now is what Mr. Thaksin does with his mandate. His decision to snub the tiny Chart Thai party, which according to first reports will not take part in the new cabinet, was not smart politics, but may, according to a financial supporter and former employee of Mr. Thaksin, be reversed in the coming weeks. "In victory, magnanimity" would be a better strategy.
On the policy level, Mr. Thaksin plans both marginal tax rate relief, and an expansion of the current micro-credit programs into something resembling savings and loans or regional banks. The latter should be a major plus if he and his party can avoid both an over-expansion of credit, or its mis-direction into favoritism for Friends of Thai Rak Thai. The former will help position Thailand even more competitively against its neighbors.
Early this year, The Bottom Line called Thailand a likely top-performer for 2005. We bought that position, took some modest profits in mid-February, and are buying back on the recent market dip.
Just in case, we're advising a stop-loss at 5 percent to 6 percent below recent levels. If Mr. Thaksin should fall prey to Asian Caesarism, markets could unravel fast. The far likelier scenario, however, is a solid start to his second term, with political capital aplenty. Still in.
--
Gregory Fossedal is an advisor on global markets and geopolitical risk to international investors, and a research fellow at the Alexis de Tocqueville Institution. His clients may hold long and short positions in many of the investment securities and opportunities mentioned in his reports. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of his clients, UPI, or AdTI. Furthermore, they are subject to change without notice.
