THD - THD: Beware Of Thailand's 'Helicopter Money' Plans

2023-11-02 13:56:57 ET

Summary

• Thailand's political overhang has finally cleared.
• Instead, markets will now have to contend with a fiscal overhang.
• Thai valuations are still pricey and remain vulnerable to future disappointments.

The iShares MSCI Thailand ETF ( THD ) has further declined since I called for caution last quarter, with Thai equities now the worst-performing market in Asia after Hong Kong. This comes despite the resolution of political uncertainty in Thailand, as a new Pheu Thai-led Thai Government was officially sworn in (albeit at the cost of an eleven-party coalition, including the military).

From here, all eyes are now on how Pheu Thai delivers on its populist economic platform, particularly the up to THB560bn ($15-16bn) "helicopter money" handout (THB10k for 50-60m Thais over the age of sixteen). The catch is that at ~3% of GDP, this is a very costly one-off stimulus measure. Without sufficient fiscal offsets elsewhere, the government may have to settle for much higher sovereign yields at the next bond auction.

With rate differentials versus the US also at multi-year highs, equity valuations are now at risk from risk-free yield pressures, offsetting any fiscal stimulus benefits to earnings near-term. Even with the MSCI Thailand poised for a cyclical earnings rebound next year (+16% consensus growth estimates in 2024 after -13% in 2023), the current ~13x P/E valuation leaves little margin for error. In my view, THD needs to de-rate a fair bit more for the risk/reward to skew favorably. For now, I would remain sidelined.

Fund Overview – Gain Exposure to a Cross-Section of the Thai Market

The iShares MSCI Thailand ETF is benchmarked against the MSCI Thailand IMI 25/50 Index, a basket of Thai stocks subject to the following weighting constraints - less than 25% of assets invested in a single holding and a 50% cumulative limit for all holdings over a 5% threshold.

Unsurprisingly, THD has seen further declines in its net asset base over the last quarter, reaching $259m (vs $297m previously). The fund's fee structure is unchanged, though; given the scarcity of Thai ETF options, the current ~0.6% expense ratio (primarily management fees) screens reasonably.

From a sector perspective, THD remains well spread out, particularly relative to comparable Southeast Asian ETFs, many of which are heavily dominated by Financials and Property. For THD, Energy continues to lead the way at a slightly increased 14.2%, followed by Consumer Staples at 12.1% and Health Care at 10.0%. The Financial sector has also seen a slight allocation increase to 9.5%, along with Industrials (9.2%). Of note, all of the fund's sector allocations run above the 5% threshold.

The portfolio has been expanded slightly to 141 stocks and has seen a slight reshuffling to its single-stock composition. Convenience store operator CP ALL ( CVPUF ) is no longer the largest allocation, trading places with state-owned oil and gas company PTT ( PUTRF ), though both holdings now have slightly lower weights. Private healthcare company Bangkok Dusit Medical Services ( BDULF ) and Airports of Thailand ( APTPF ) round out the holdings with a weighting over 5%. With no single holding anywhere near 10% and only four over 5%, THD's single-stock allocation is also well spread out.

Fund Performance – Headed for One of its Worst Years on Record

THD has now declined by a staggering 19.0% this year (for context, the COVID-driven drawdown in 2020 was "only" ~9.7%), bringing down its total annualized return since inception to +4.2%. The latter figure comes with a big caveat, though, as shareholder returns over the last decade have lagged performance in the early years by a wide margin. Annualized returns over the last five- and ten-years stand at -5.4% and + 0.8%, respectively - hardly adequate compensation for taking on emerging market risk.

The fund's distribution continues to trail other Southeast Asian ETFs, though at 2.9% on a trailing twelve-month basis (2.7% 30-day SEC yield) with far less banking exposure, the yield isn't too far off. Many of THD's holdings are also blue chips with strong underlying fundamentals, so I don't have any issue underwriting a sustained low-single-digit yield from here. The earnings valuation is a different story – paying ~13x P/E (high-teens forward) for a group of stocks on track for a low-teens percentage earnings decline this year (high-teens rebound next year) seems pricey. While political stability has returned and Thailand's tourism recovery is on track (albeit at a more gradual pace due to China's slowdown), I would be hesitant about underwriting the kind of sustained earnings growth needed to justify current price levels.

Large Stimulus on the Horizon; Benefits Outweighed by Financing Risks

Now that the growth-oriented PT-led government is in place, expect the rollout of several fiscal measures on the path to its +5%/year real GDP growth target. The most notable of these measures is a digital transfer payment scheme (a blockchain-based form of "helicopter money") planned for launch early next year. The specifics remain unclear, but the intent seems to be a digital voucher-like structure with limits on spending categories (e.g., only on goods and services at local businesses within a certain distance from user addresses) and duration (likely a six-month expiry). An early central bank digital currency ((CBDC)) implementation, if you will, except with the government as the primary issuer (vs the central bank in most other CBDC projects).

Fiscal stimulus is generally welcome news for equity investors – but only if adequately funded. In this case, the digitalized transfer payment is estimated to cost ~3% of GDP, assuming THB10k transfers to 50-60m citizens, at a time when the government has given up a fair bit of fiscal revenue via populist measures like electricity price cuts.

Even in the likely scenario that this digital transfer payment is targeted to exclude households at the upper end of the income bracket, the damage from incremental funding concerns will weigh on the outlook for Thai sovereign bonds. That could entail higher risk-free yields at upcoming auctions, as investors weigh the risk/reward of elevated Thai bond supply at a time when rate differentials are already at multi-decade highs (the Thai 10-year yields ~3.2% vs ~4.7% for 10-year Treasuries). Plus, the Fed's "higher for longer" stance may well force the BoT into a more hawkish reaction function, further weighing on equity valuations from here.

Beware Of Thailand's "Helicopter Money" Plans

2023 is shaping up to be one of THD's worst years on record, as political uncertainty throughout H1 is replaced by external and domestic fiscal concerns. Thus far, the Pheu Thai-led coalition government has followed through with its populist promises, though higher spending without a revenue offset could weigh on benchmark rates.

Particularly concerning is the upcoming THB10k "helicopter money" initiative, which could cost as much as ~3% of GDP. While these will add a few points to growth in a best-case scenario (although cash transfers tend to have a limited multiplier effect), the side effect of unnecessary fiscal strain may not be worth it at a time when the country is undergoing an extended economic malaise. More populism also risks derailing BoT rate cuts, further weighing on sovereign yields and, by extension, equity valuations (via a higher discount rate). At ~13x P/E, THD isn't priced for fiscal or potential political risks down the line. Given the limited safety margin at these levels, I remain neutral.

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