HSBC downgraded Thailand's equities to underweight from neutral amid the poor macro-economy and expensive valuations.
"Thailand's economic boom didn't last long," HSBC said in a note, adding that consumer confidence is falling as the effect of populist policies is wearing off, the strong baht has hurt business sentiment and household debt is rising.
Thailand's household debt swelled to 77.5% of gross domestic product (GDP) at the end of the first quarter, close to the 80% level where Bank of Thailand governor Prasarn Trairatvorakul felt financial stability may be at risk, limiting the economy's ability to keep growing. Thailand's household leverage is escalating to catch up to South Korea, which had the highest household debt in Asia at 88% of GDP at the end of March. Malaysia's household debt stood at 80.5% of GDP.
"The consensus is expected earnings growth of 14.5% for 2013, which we feel is little optimistic, so there is a risk of negative earnings surprises. Earnings momentum has been negative since the beginning of the year. Valuations are expensive as well, with 12-month forward P/E trading at 11.8 times, a premium of 11% compared to its own story," the report said.
HSBC recently cut Thailand's economic growth forecast to 2.8% this year from 5% previously and to 4.4% next year from its previous target of 6.2%.
A labour shortage will curb growth and Thailand's population is ageing, implying consumption may peak and companies will face increasing margin pressure in the future, the report said.
A key risk will be any increase in anti-government protests, which may dampen corporate and investor sentiment, it added.
Local fund managers suggested investors avoid commodities and bonds for short to medium-term investment, given the market remains highly volatile amid concerns over US stimulus tapering and the looming debt ceiling deadlock.
Stocks still yield high returns and Thai equities should account for 50-60% of an equity portfolio, with global stocks 10-20% or more, depending on the risk appetite of each investor.