FidelityÆs Gillian Kwek shares her views on Thailand

Kwek, who manages FidelityÆs $1.1 billion Asean Fund, sees many interesting opportunities in ThailandÆs equity markets, but closes her arguments with this caveat: ôBarring a fresh coupö.
Gillian Kwek joined Fidelity Investments Management in Hong Kong as an analyst in 2001. Now a portfolio manager based in Singapore, she manages Fidelity Funds û Asean Fund, which has around $1.1 billion in assets. Thailand, which is one of the most attractive equities markets in Asia in terms of valuations, makes up around 15% of that fund in terms of geographic allocations, next to Singapore and Malaysia. Among the fundÆs top 10 holdings is ThailandÆs Siam Commercial Bank.

Kwek shares her views about Thailand with AsianInvestor and how she is positioning in that market given the opportunities created by the new governmentÆs confidence-building measures, expectations of strong investments in the economy, and improving domestic consumption.

Thailand's new government û under the leadership of prime minister Samak Sundaravej, the conservative ally of former prime minister Thaksin Shinawatra who is now back in the country after being in exile for 17 months û has been boosting investor sentiment through measures such as the lifting of capital controls that were put in place following the bloodless September 2006 coup and encouraging more foreign investment in the country. Politics, while appearing to be stable at the moment, remains one of the key risks in investing in Thailand.

What is your near- and long-term outlook for the Thai stock market?

Kwek: Thai equities have been fairly resilient to the global credit market turmoil, outperforming most other regional markets since the beginning of this year. Share prices have primarily been supported by a recovery in investor sentiment, which is a result of an improved political and economic environment. We expect economic momentum to continue to build up throughout the year, which in turn should underpin corporate earnings. Liquidity levels should remain high given the easing of restrictions on foreign capital inflows.

However, there are risks which could arise from mounting inflation and political developments. While Thailand benefits as an exporter of agricultural products, this does not insulate it from rising food prices. The risk, shared by the other Asian economies, is that unchecked inflation will erode real income and spur demands for wage increases. The major policy implication is that the Bank of Thailand needs to maintain relatively tight monetary conditions. This should not hamper the recovery in domestic demand since interest rates are sufficiently low in real terms to fuel private sector spending.

Meanwhile, public spending will be affected by lifting investor and household confidence. In addition, implementation of infrastructure mega-projects will fuel private investment activity in the construction sector and allied industries. On the external front, there are risks arising from a global economic slowdown. Within Asia, Thailand is one of the most exposed to high fuel prices which makes its economic recovery vulnerable if oil prices spike.

What is your weighting on Thailand within an Asian equities portfolio?

I primarily employ a bottom-up stock picking strategy and as such, do not make investment decisions based on country calls. The overall view on Thailand is favourable and at the end of the March quarter, the Fidelity Funds - ASEAN Fund held an overweight country allocation to Thailand.

What are the opportunities that you see in the Thai stock market at the moment?

As policy uncertainty dissipates, stronger domestic demand coupled with relative high capacity utilisation should improve companiesÆ operating leverage. This reinforces my view that investments will be the key growth driver this year with catalysts from auto manufacturing and tourism, specifically medical tourism. While higher energy and materials prices have boosted resources stocks, banks have benefited from buoyancy in loans growth.

The new governmentÆs confidence boosting measures should benefit certain sectors, such as construction and consumer discretionary. The restrictions on foreign funds investing in financial assets including bonds and property trusts in the country have been lifted, which should contribute to liquidity in the stock market. I feel interesting opportunities can be found in domestic demand oriented sectors such as banks, property and retail.

What are the sectors that you favour in Thailand?

Rising consumer and business confidence should lead to improvement in domestic spending and investment. I favour banks that will benefit from improved loan growth in both corporate and domestic sectors. Real estate companies should also do well as property sales should rebound from depressed levels and because Thailand still has very positive demographic trends favouring home ownership. Energy related companies should do well as oil prices remain high globally.

How would you describe the current state of investor confidence in Thailand?

The rise in business sentiment and consumer confidence post the election suggests that a stable new government is welcomed by the broader population. Early efforts to promote saving, investment and capital availability in the country have reassured investors, business and consumers about the countryÆs economic prospects. With regards to the fiscal stimulus, the positive effect may be realised through the confidence factor rather than from a substantial increase in public spending.

In terms of valuations, how does the Thai stock market compare with other markets in the region?

Valuations in the Thai market are broadly in line with the regionÆs average. As at end of March 2008, Thai stocks were more attractively priced than their counterparts in Indonesia, India, China, Hong Kong and Taiwan.

How does the valuation of the Thai stock market compare with historical levels?

Although the valuations have risen from their single digit levels, as of end-March 2008, the price earnings ratio was comparable to its historic average. At around 12 times P/E, it is attractive versus the regionÆs P/E of around 15 times.

Do you see the victory of the People Power Party (PPP), backed by ousted prime minister Thaksin Shinawatra, in last year's national elections as a significant plus or minus for the local stock market?

The election outcome has proven to be a positive factor for the stock market, although some political uncertainty remains. Unfortunately, there is no single event or date which will signal to investors that the political risk has subsided permanently. I believe that given the current uncertainty the risk premium on Thai securities could remain high. However, expectation of strong growth in earnings from depressed levels should provide attractive opportunities for investment. Barring a fresh coup, the Thai market should continue to perform well.
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