Thai shares sank 5.23% to the lowest level in almost 16 months and the baht fell to just shy of 33 to the US dollar on the first trading day of 2014 due to mounting political worries after anti-government protesters announced they will step up action.
Securities analysts warned the stock market could head to between 1,150 and 1,200 points in the coming weeks.
The SET index yesterday began on a negative note and further slid to close the market at the day's trough of 1,230.77 points amid the prolonged protests that have gripped Bangkok since late October, with moderate trade worth 33.5 billion baht.
Local institutional investors were sellers of Thai shares with a net amount of 3.66 billion baht.
Analysts believe they dumped the stocks to prepare cash for an anticipated redemption of long-term equity funds (LTFs), of which units can be sold after five calendar years as per Revenue Department requirements.
Foreign investors bought Thai shares yesterday, with a net position of 125 million baht after pulling 194 billion out of the local market last year.
Unlike the Thai bourse, Southeast Asia's worst performer in 2013, the Jakarta Stock Exchange's main gauge surged 1.24% yesterday, while the Philippine Stock Exchange's PSEi Index jumped 1.6%.
The Thai stock market ended last year as the eighth-worst performer in the world. The decline was also the first annual retreat in four years, losing nearly 7% from 2012 to close 2013 at 1,298.71 points.
The ongoing political woes and the US Federal Reserve's stimulus rollback have been blamed for the decline.
The Ho Chi Minh City Stock Exchange ended the year up by 22%, becoming Southeast Asia's best performer, followed by Malaysia with a 10.5% yearly gain.
The continuing capital outflows also underlined the baht's retreat against the greenback.
The baht yesterday weakened to 32.95/97 to the dollar, its weakest level since March 1, 2010, after losing 7% last year in the biggest drop since 2000.
"There now seems to be no exit from the current political impasse," said Padon Vannarat, a vice-president of Maybank Kim Eng Securities.
He said investors' concerns are escalating, as the caretaker government is expected to pass an emergency decree to deal with the planned mass rally to shut down the whole of Bangkok on Jan 13, possibly igniting violence.
Uncertainty over whether the Feb 2 election will be held and a new government formed even if the poll takes place as scheduled has dent demand, said Mr Padon.
He said the selling spree by local institutional investors to prepare cash for LTF redemption also hurt sentiment.
The local bourse's main gauge could stage a technical rebound following the steep fall before resuming a downward trend due to the unfolding political tensions.
Investors are recommended to start accumulating stocks when the SET index hovers around 1,200 to 1,220 points, the level at which Mr Padon believes the political woes have largely been priced in.
Kasikorn Securities vice-president Kitpon Pripisankit said the Thai stock market could slide to between 1,150 and 1,200 points, the average cost level of foreign investors.
"Both the Thai stock market and the economy are expected to bottom out in the first quarter," he said.
"Political risks weigh the most in the Thai stock market now, and it is the only factor that differentiates the local market from others."
Bank of Thailand spokesperson Roong Mallikamas yesterday said the dollar gained following the Fed's asset-purchase rollback and the thin trading volume after the New Year holiday, while the ongoing political uncertainty was depressing the baht.
"However, the baht's weakness is deemed to be in line with Thai economic conditions," she said.
Ms Roong said the baht's pullback will not fan inflation since imported products account for less than 20% of the inflation basket and domestic consumption remains lacklustre.
However, she declined to estimate the impact on the economy this year of the planned Bangkok shutdown.