Thailand scrambled through a double whammy of internal and external factors during the first half of 2019.
On the internal front, although the first general election since the 2014 coup went off without a hitch, the lengthy process of forming a new government and the slim parliamentary majority are clouding the economic outlook and eroding investor and consumer confidence. Fiscal 2020 budget disbursement will likely be delayed from its regularly scheduled start on Oct 1.
On the external side, despite a trade truce between the US and China, doubts persist over whether the two sides can reach an agreement.
Thailand's economic growth is losing steam, as seen by the fact that GDP grew by the slowest pace in more than four years at 2.8% in the January-to-March quarter, bogged down by declining exports and ebbing private investment.
Even with the backdrop of negative factors in the first half, June was a banner month for investors in Thailand: the baht, bonds and stocks outperformed Asian peers amid an influx of offshore capital. Foreign inflows into Thai equities were the highest in Asia in June.
With the 100-point gain in the SET index last month and still-low interest rates in the domestic market, it's time for investors to review their asset allocation and brace for swings between, on the one hand, hopes for economic stimulus, rebounding growth and rate cuts, and on the other, fears of a trade dispute flare-up and geopolitical tensions.
Key investment themes
Thailand is facing both headwinds and tailwinds locally and internationally in the second half of 2019:
- Amid the stuttering global economy, central banks led by the Fed and the European Central Bank have reversed course and opened the door to monetary policy easing. The signals have triggered massive capital inflows into emerging-market bonds and equities.
- Despite the wobbly truce in the US-China trade dispute, the conflict is likely to deepen and extend to non-tariff measures.
- The trade tensions between the world's two biggest economies and the late cycle of economic expansion are stifling global economic growth momentum and exports.
- Manufacturers are leaving China and moving to Southeast Asian countries to avoid the impact from Sino-US trade tensions.
- Geopolitical risks and domestic political instability in various corners of the world could escalate. Risks include conflicts in the Middle East, India-Pakistan tensions, the uncertain outcome of Brexit, the unresolved nuclear situation in the Korean Peninsula and disputes in the South China Sea.
- Although Thailand's economic momentum in the second half is expected to pick up from the January-June half, concerns remain as to whether the rebound will be too mild.
- The new government's stability needs close watching after the formation of the shaky coalition government led by Prayut Chan-o-cha. Passage of the fiscal 2020 budget is in focus.
- With the sluggish economic outlook, the government is expected to unveil fresh stimulus measures, focusing on boosting domestic consumption and investment.
- The chances of a policy rate cut have improved as the economy runs out of steam and the baht's gains set the pace for Asian currencies.
- Paiboon Nalinthrangkurn, chairman of the Federation of Thai Capital Market Organizations, said recently that a further 60 billion baht worth of net offshore inflows were likely to move into Thai stocks in the remaining months of 2019 after foreigners bought a net 47 billion baht in the first half.
Assembling assets
Sunthorn Thongthip, a strategist at Kasikorn Securities, recommends investors focus on domestic investment to cash in on the government's stimulus measures, state investment and persistent offshore fund inflows.
Local shares, particularly large-cap stocks, high-dividend names and domestic plays, as well as those benefiting from rate cuts, should make up the biggest portion of the investment portfolio, Mr Sunthorn said.
His firm recommends piling into CP All Plc (CPALL), Home Product Center Plc (HMPRO), Charoen Pokphand Foods Plc (CPF), Central Pattana Plc (CPN), Asian Property Development Plc (AP), Amata Corporation Plc (Amata), Sino-Thai Engineering and Construction Plc (STEC), Ch. Karnchang Plc (CK), B.Grimm Power Plc (BGRIM), Total Access Communication Plc (DTAC) and BTS Group Holdings Plc (BTS).
Laggard plays that Kasikorn Securities recommends buying include Robinson Plc (ROBINS), Berli Jucker Plc (BJC), Central Plaza Hotel Plc (CENTEL), True Corporation Plc (TRUE), Origin Property Plc (ORI), Siam Cement Plc (SCC) and Bangkok Bank (BBL).
The brokerage house suggests investors allocate assets to infrastructure funds as an alternative investment.
Sombat Narawuttichai, president of the Investment Analysts Association, said Thai shares have limited upside gain.
"The SET index is expected at 1,750-1,760 points later this year and it's likely the index slips below the 1,700 mark, which is the entry point," Mr Sombat said.
He recommended investors keep 30-40% in local shares, 30% in bonds and fixed-income funds and 30% in foreign equities. Gold and real estate investment trusts (REITs) should fill any remaining space.
Gold typically fares well amid mounting uncertainty and has regained its shine after several years of weakness.
A diversified portfolio with a mix of investments is the appropriate strategy amid swings between negative and positive factors, Mr Sombat said.
For local stocks, he recommends buying retail names on the grounds that those companies will take advantage of the government's planned stimulus measures.
Other upside plays include the banking sector and stocks related to state infrastructure investment, such as industrial estate developers and construction firms.
"I recommend investors stay invested and stay diversified," said Win Phromphaet, chief investment officer of Principal Asset Management. "I also recommend investors reduce weight or take profits in risky asset classes, especially stocks, gold and REITs, and put more weight in short-term bond funds."
Given the recent rally and slower growth of earnings than previously expected, local stocks' valuations are not attractive, Mr Win said.
"We recommend investors be more cautious when the SET index is close to or above 1,750," he said. "Should there be a correction again, the index level of 1,600 is an attractive entry point."
Mr Win advises investors to use an age-based asset allocation model, whose general rule is that younger investors should take more risks because they have more time to recover from losses, while older investors should take fewer risks.
For example, a 20-year-old investor should put 40% in Thai shares, 15% each in property funds and overseas stocks, 5% in gold funds and the rest in debt instruments.
Meanwhile, a 60-year-old retiree should invest 10% in Thai shares, 80% in bonds and the rest in other asset classes.