Equities Poised For Further Losses In The Lead Up To Elections

BMI View: Thai equities have technically entered bear market territory and we see room for further losses over the coming weeks. We caution that the Thai baht could also face further selling pressure as foreign investors continue to shift capital abroad amid escalating political tensions. We see a remote chance for a long-term resolution to the deep political divide in Thailand and we warn that investors could begin to grow weary of the prolonged stalemate.

Thai equities are technically in a bear market with the benchmark Stock Exchange of Thailand Index (SETI) off by 20.9% from its May 2013 peak. Although equity valuations in Thailand have become more attractive relative to the region following the deep sell-off, we see room for further losses over the coming weeks as political unrest looks set to intensify in the lead up to February 2 elections. The technical picture for the SETI also supports our bearish short-term outlook, with the index closing in on its August low of 1,276 amid declining volumes ( see chart).

Latest data published by the Stock Exchange of Thailand indicate that foreign investors have already pulled more than THB200bn (US$6.3bn) worth of funds from the local equity market - THB88.6bn (US$2.8bn) from stocks listed on the main bourse alone - since protests began in November. Meanwhile, the Thai baht is among the worst performing currencies in the region for 2013, having depreciated by around 5.0% against the US dollar since November to trade at THB32.84/US$. We believe that the Thai baht could face further selling pressure as foreign investors continue to shift capital abroad as the political stalemate in Thailand stretches into Q114.

Technically A Bear Market
Thailand - Stock Exchange of Thailand Index (SETI) & Volume, mn shares

Equities Poised For Further Losses In The Lead Up To Elections

BMI View: Thai equities have technically entered bear market territory and we see room for further losses over the coming weeks. We caution that the Thai baht could also face further selling pressure as foreign investors continue to shift capital abroad amid escalating political tensions. We see a remote chance for a long-term resolution to the deep political divide in Thailand and we warn that investors could begin to grow weary of the prolonged stalemate.

Thai equities are technically in a bear market with the benchmark Stock Exchange of Thailand Index (SETI) off by 20.9% from its May 2013 peak. Although equity valuations in Thailand have become more attractive relative to the region following the deep sell-off, we see room for further losses over the coming weeks as political unrest looks set to intensify in the lead up to February 2 elections. The technical picture for the SETI also supports our bearish short-term outlook, with the index closing in on its August low of 1,276 amid declining volumes ( see chart).

Technically A Bear Market
Thailand - Stock Exchange of Thailand Index (SETI) & Volume, mn shares

Latest data published by the Stock Exchange of Thailand indicate that foreign investors have already pulled more than THB200bn (US$6.3bn) worth of funds from the local equity market - THB88.6bn (US$2.8bn) from stocks listed on the main bourse alone - since protests began in November. Meanwhile, the Thai baht is among the worst performing currencies in the region for 2013, having depreciated by around 5.0% against the US dollar since November to trade at THB32.84/US$. We believe that the Thai baht could face further selling pressure as foreign investors continue to shift capital abroad as the political stalemate in Thailand stretches into Q114.

Losses Are Mounting
Thailand - Exchange Rate, THB/US$

Political Unrest Set To Intensify In 2014

Our bearish outlook on Thai assets is consistent with our view that despite Prime Minister Yingluck Shinawatra's offer to dissolve the parliament and pave the way for fresh elections, anti-government protestors are unlikely to back down. The People's Democratic Reform Committee (PDRC), led by former Democrat Party deputy leader Suthep Thaugsuban, is demanding for a royally-appointed government to spearhead political reforms to dismantle the political network of ousted former prime minister Thaksin Shinawatra.

Although Yingluck has dismissed the PDRC's demand as unconstitutional and a threat to the country's democratic ideals, and has pledged against the use of force to clamp down on protestors, this has resulted in a political stalemate that is likely to intensify in the lead up to the general elections. Furthermore, with the country's main opposition Democrat Party having chosen to boycott the upcoming elections, a victory for Yingluck's Pheu Thai Party (PTP) would be deemed illegitimate. We caution that such large-scale protests could potentially turn violent, posing significant downside risks to Thailand's political outlook - our short-term political risk rating (STPR) for Thailand currently stands at 62.5, well below the regional average of 74.6.

Foreign Investors Are Pulling Out
Thailand - Net Foreign Capital Inflows (SETI), THBmn

Overall, we see a remote chance for a long-term resolution to the deep political divide in Thailand. Although foreign investors have managed to look past the recurrent political unrest in Thailand and the equity market has often recovered quickly from such turbulent periods in the past, we warn that investors could start to grow weary of the prolonged political stalemate in Thailand. On the other hand, a swift resolution to the political crisis in Thailand (which is not our core view) could bode very well for Thai equities in 2014.

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