THD - THD: Outlook Improves In 2023

2023-06-02 18:43:03 ET

Summary

• Thailand's economy is poised for recovery, with tame inflation and potential tourism resurgence in 2023.
• Equities are trading at reasonable valuations, but other emerging markets may offer more compelling opportunities.
• iShares MSCI Thailand ETF has declined 27% in the past five years and has not yet returned to pre-COVID highs.

Overview

Equities in Thailand are worth examining, as the economy is poised to recover from the 6.1% contraction experienced in 2020. Inflation has been tame relative to inflation in other emerging markets, and the economy could benefit from the recovery of tourism in 2023. Equities are trading at around 16x forward earnings and only offer a 2.8% dividend yield. While this valuation is not unreasonable, other emerging markets, particularly in Latin America, trade at more compelling valuations.

The iShares MSCI Thailand ETF (THD) has declined by 27% in the past five years and has still not bounced back to pre-covid highs. Investing in Thailand makes sense if you are bullish on emerging markets, even though it does not have the best risk-reward profile. Thailand will likely be a key investment destination when emerging markets heat up again, as it is the 2nd largest economy in ASEAN.

Outlook

Thailand's economy is relatively resilient and grew around 5%/annum for several years following the Asian Financial Crisis. NESDC lowered its 2023 Thailand growth forecast to 2.7-3.7% , down from 3-4%. Growth was slower than expected in Q1 2023, although this was still a significant improvement from Q4 2022. Thailand has also been introducing tax cuts to help boost domestic consumption in 2023.

Thailand's Quarterly GDP Growth

Inflation has been under control in Thailand, and the Central Bank only had to hike interest rates by 25bps to 2% recently . This interest rate hike should not have a significant impact on growth in 2023-2024. Rather, the main issue is the potential decline in exports due to slower global growth.

Tourism

Thailand received 11 million tourists in 2021 , and although this was a significant improvement, it still represents a fraction of the country's potential. Thailand received 40 million tourists in 2019 and has the potential to continue attracting these numbers this decade. Thailand received 6.15 million tourists during Q1 2023, so it is reasonable to assume that Thailand will receive at least twice as many tourists this year relative to 2021. Peak summer travel demand, driven by Chinese tourists, could help bring these numbers above 30 million. Equities seem to have responded to this expectation, as seen by the rebound in the share price of Airports of Thailand Public Company Limited.

Airports Corporation of Thailand, which is one company that tracks the growth of tourism in Thailand, has still not returned to its 5-year high. There are two factors to note:

• Tourism accounts for around 11.5% of Thailand's GDP , so this should have positive spillover impacts on the economy.
• There are not many leisure/tourism pure play stocks that US investors can access, and many of these may have responded positively already. Most investors have been bullish on Thailand lately because of the known recovery in Chinese tourism demand.

Tourism is certainly a strong catalyst, but there does not appear to be a fat pitch in the equities market now. It is also important to take a closer look at the manufacturing industry, and Thailand's export outlook, as the country is heavily exposed to global trade. Manufacturing activities account for around 21% of GDP . Thailand's economy is highly dependent on export growth, as its trade/GDP is over 116%, and exports account for around 65% of GDP .

Global Growth and Exports

Weaker export growth in 2023 may offset the positive impact of tourism growth in Thailand this year. Thailand's exports declined for five consecutive months between October 2022-February 2023, primarily from weaker demand in markets like Europe. KS Research projects that the country's exports will decline by 1.2% this year. Thailand's current account balance was under pressure following 2020 but has begun to recover. Increased tourism arrivals in 2023-2024 could help to offset the potential decline in exports.

Thailand's CA Balance: Deficits Following Covid

Thailand's main export destinations include the United States, China, Japan, Hong Kong and Vietnam.

Thailand also has the opportunity to benefit from the growth of the electric vehicle, or EV, industry. Chinese EV companies will likely increasingly use Thailand as a hub for manufacturing EVs in the future. Moreover, Thailand may be able to boost its rare earth metals production as countries focus on diversifying away from China. Thailand's rare earth production more than doubled since 2020, and the country is now the world's 5th largest rare earth miner .

Thailand is also the world’s 2nd largest exporter of hard disk drives, air conditions, and washing machines, and ranks 6th-8th for compressor and refrigerator exports.

Thailand’s healthcare industry will also likely be a strong driver of growth. Thailand is a leading destination for medical tourism , which is poised to recover in 2023-2024. Thailand is also a major medical device manufacturer, and manufactures key components used in surgical gloves and masks.

iShares MSCI Thailand ETF

Since there are not very many liquid ADR/OTC listings, it is best for investors limited to U.S. exchanges to invest in ETFs. The iShares MSCI Thailand ETF trades at around 14x P/E , which is a considerable discount to MSCI Thailand and other MSCI Emerging Market indexes in Asia. The dividend yield for this exchange-traded fund, or ETF, is only around 2.5%, so this is not the best vehicle if you are searching for yield in emerging markets.

The industry composition of this ETF is favorable, as it provides investors with strong exposure to healthcare, consumer and IT stocks. Moreover, only around 10% of the ETF's assets invest in financials, which is lower relative to that of other frontier and emerging market ETFs ( can often be 20-40%).

Other Countries Poised to Benefit from Tourism

Many emerging market economies have struggled because of the decline in tourism arrivals due to Covid.

Equities in Greece have benefited the most from the recovery of tourism globally. Greece will also likely attract around 30 million tourists this year, which should substantially benefit the economy.

Many tourists who visit Thailand are from nearby countries and only stay for a shorter time. If you are focused on other countries poised to benefit from tourism growth, Greece and Egypt are two solid options.

However, the main benefits of investing in Thailand include its strategic position within ASEAN, and its potential to continue growing as a regional manufacturing powerhouse. The recovery of tourism in 2023-2024 could help Thailand make a more smooth transition to its manufacturing-based economic recovery.

Slower growth could weigh on Thailand's economic growth, but the boom in tourism will help offset this slightly. Accessing Thailand's equity markets at 12-15x earnings seems reasonable, so I think the iShares MSCI Thailand ETF is a good hold for the time being.

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