Strong demand for Thai bonds from local institutional investors could offset the foreign sell-off expected when the US Federal Reserve decides to raise rates, says one fund manager.
Foreign investors are expected to exit the Thai bond market and other emerging markets to chase higher yields once the Fed starts to "normalise" its benchmark rate in line with the recovering US economy.
"Local institutions are still keen to invest in Thai bonds, as prices remain attractive compared with other markets," said Win Udomrachtavanich, chief executive of One Asset Management.
Foreign funds' investment in the Thai bond market is about 625 billion baht, of which 70% is in long-term bonds.
"It is possible that they might rather sell out of short-term bonds," Mr Win said.
He said institutional investors such as the Social Security Fund (SSF), the Government Pension Fund (GPF), mutual funds and insurance companies are keen to invest in government bonds and cash management bills issued by the Bank of Thailand.
"Currently the asset sizes of major local pension funds in the country are quite large, such as the more than 1 trillion baht of the SSF and assets worth billions. GPF also has billions," Mr Win said.
With funds of this size, they can offset outflows and ease panic selling in the local bond market.
Mr Win said foreign investors had been cutting their investment in Thailand since last year because of domestic market uncertainty, confusing government policies and weaker-than-expected economic data.
"Given these factors, even if the Bank of Thailand were to cut interest rates further, it would not improve either bond or stock market sentiment," he said.
"The last time the Bank of Thailand cut the rate to 1.75%, it prompted only a few banks to follow suit. So I think the central bank has to be cautious about cutting rates further. How many banks will cut the rate too?"
He suggested that while the Thai bond market is not as attractive now, investors can elect to buy Thai shares that show high earnings growth, plus Chinese, Japanese and Asean equities whose returns are higher.
The portfolio should be weighted 60% other Asian equity, 20% Thai equity and 20% property funds, he said.
One Asset Management is maintaining an SET index target range of 1,500-1,600 for 2015.
Jessada Sookdhis, chief investment officer at CIMB-Principal Asset Management, disagreed that a US rate hike would significantly affect the Thai bond market.
He expects a gradual normalising of US interest rates in the second half of the year.
"The [US] rate will rise gradually and not exceed 0.5% in 2015," Mr Jessada said. "Thailand's rate is likely to remain at 1.75% throughout the year, and it may fall further to 1.50% in the first half of next year."
He predicts that the gap between the Thai and US rates would stay near 1% through 2016.
"I don't think we will see significant outflow from the Thai bond market despite a US rate increase, because they will prefer to raise it at a slow pace to make sure currency exchange doesn't swing too wildly," he said.
"Given those factors, Thai bonds will maintain higher yields than those US assets, so most foreign funds should rather stay here."
Fund outflows may occur, he said, but it would take a serious event such as Greece delaying debt payments or Russia encountering deeper economic trouble.
Mr Jessada agreed that investors should put more into global equities that can generate higher returns, which would have the added effect of alleviating local bourse volatility.