Thai equities plunged sharply this week, with the Stock Exchange of Thailand index breaking key support levels and revisiting lows not seen since early April, when US President Donald Trump announced steep new tariffs and panic selling ensued before shares staged a rebound.
This week's drop was driven by rising domestic political uncertainty, culminating on June 18 when Bhumjaithai, the second-largest coalition party, announced its withdrawal from the ruling coalition following a failed negotiation over ministerial positions.
This was compounded by a leaked audio clip of the prime minister in conversation with Hun Sen of Cambodia over the border dispute, escalating into a seemingly uncontrollable political scandal.
Both domestic and foreign investors responded with heavy sell-offs, as the issue went far beyond cabinet negotiations -- raising concerns of potential House dissolution, mass protests and a political vacuum that could delay policymaking and fiscal spending.
Externally, Israel-Iran tensions escalated, with the US signalling stronger support for Israel and even hinting at joint military action to stop Iran from producing a nuclear weapon. While global risk assets were not volatile to any great extent, oil prices surged, lifting energy stocks.
Meanwhile, the US Federal Reserve's decision to hold interest rates steady did not surprise the market, but forecasts now lean towards just one rate cut this year. Fed chief Jerome Powell said he foresees "meaningful" inflation ahead as the impact of tariffs on US prices grows.
On the SET, the highlight among individual stocks was Airports of Thailand (AOT), which tumbled to a 10-year low as the duty-free operator King Power is seeking to exit its agreement covering five airports.
In the coming week, both domestic politics and the Middle East conflict will dominate sentiment. Local politics will likely be a more influential factor on the SET, but geopolitical conflicts will also affect foreign investors' views.
In terms of local politics, we could see escalating upheaval and demands as the government has lost its negotiating power. Economic recovery will likely be pushed off, despite parliamentary approval of the budget bill's first reading.
There are two weeks left before the House reconvenes, and if there is still no clarity by that time, there could be more trouble ahead.
If market sentiment shifts, a strong rebound could occur, but we prefer a wait-and-see stance. Investors should consider rotating into safer sectors or those that may benefit from global tensions, such as energy, refiners and shipping, instead of domestic plays.
Holding 50% or more in cash or bond-like instruments is advisable. There's no need to catch the bottom, because nobody can time the bottom and there will be time to catch up once stability returns.
Among the positive factors that could support the market:
If domestic political tensions can be resolved with a clearer direction
If the US and Israel can negotiate or at least schedule a discussion with Iran, particularly on ceasefire talks
More US trade negotiations with countries in Asia
End-of-quarter window dressing by institutional investors
Other than easing trade worries, we see only a slim chance for most of the other factors to occur. Among the negative factors and risks:
An increasingly volatile domestic political situation with mounting worries over street protests, as ongoing nationalism can ignite public anger more easily than in previous times of trouble
The Middle East war escalating and spreading regionally, with more countries joining the conflict. Once a country joins, stepping out will be very difficult.
Negative signals on earnings as front-loaded demand drops amid risks of slowing consumption