Thailand’s political situation may have attracted more headlines than its stock market in recent years, but the turmoil in government obscures the encouraging prospects for its corporate sector. Thai companies have shown themselves capable of strong growth, regardless of the prevailing macroeconomic climate.
Why is this? Thai companies have grown used to accommodating turmoil. In contrast to their government, they have proved a source of stability, particularly when compared to some of their Asian peers.
This has been manifest in a number of ways: Corporate governance has undergone a sea-change since the problems of the late 1990s during the Asian crisis. Companies have embraced the guidelines laid down by the Asian Corporate Governance Association and have displayed far greater capital discipline. Many have sold off non-core assets and become more transparent. The days of the unwieldy conglomerate are, largely, at an end.
Within the context of wider Asian markets, Thailand is third only to Singapore and Hong Kong in terms of corporate governance. We find that the companies have well-run shareholder meetings and strong internal and external regulation.
A second manifestation of this stability has been in dividend payouts. The trend to return more capital to shareholders, either through dividends or buybacks has been seen across Asia, but it has been particularly strong in Thailand. Payouts have increased at least in line with earnings.
Aberdeen New Thai Investment Trust currently pays a net dividend yield of over 2%. We do not target a dividend yield on the trust, but a higher dividend yield has proved a natural consequence of looking for higher quality companies for our portfolio in Thailand.
Thai companies have also been key beneficiaries of the strength of the wider Asean region. Many larger companies have been able to export into their faster growing neighbours, notably Cambodia, Malaysia and Vietnam.
The Thai market is one of the broadest and most diverse in Asia. The Stock Exchange of Thailand currently has over 580 listed companies with a combined (http://www.set.or.th/en/market/market_statistics.html). It encompasses a broad range of sectors and industries. As with many emerging markets, banks, insurance companies and energy/commodity companies are dominant, but we do not struggle to build a diversified portfolio, with no one sector comprising more than 15% of the portfolio. Our portfolio includes media and published companies, for example, alongside information technology and communications groups.
We also believe there are reasons to be more positive on the Thai domestic situation. The military government has made reforms and democratic elections are now scheduled for 2017. In the meantime, the government has prioritised infrastructure spending, which is having an important knock-on effect on many companies. In our portfolio, for example, we hold Siam Cement – a key beneficiary of the building boom across the country.
The political turmoil has affected inward investment and, as a consequence, economic growth. The Government recently moved its growth projections for 2016 from 3.7% to 3.3% (However, interest rates are still accommodative and government finances are in good shape.
China remains a major trading partner and the fortunes of Thailand are, to some extent, tied to those of its giant neighbour. It had been thought that the devaluation of the Chinese yuan might weigh on Thai exports. However, the Thai bat has also depreciated sharply since the start of 2015 and has yet to recover to any great extent. (http://www.bloomberg.com/quote/USDTHB:CUR). This should support Thai exports, and by extension, the Thai economy, over the next year. Equally, we believe the Chinese economy is turning a corner and this should give the Thai economy a boost.
We believe that all these factors may ultimately create a more benign backdrop for companies to grow earnings this year. However, in the long-term, we would argue that the political backdrop is relatively unimportant. Plenty of companies have managed to grow earnings whatever the political weather. There remain real areas of growth in the economy within which active fund managers can find opportunities.
The trust’s focus is on bottom-up opportunities – finding the highest quality companies, where management has a track record of looking after shareholders. We want those companies considered to be trading a too low a valuations relative to their long-term potential.
We see meetings with management as an essential part of our process. Many companies in Thailand have large family ownerships and we need to ensure that our interests are aligned with theirs. We are looking for management teams that have shareholder interests at heart
We have 37-38 companies in our portfolios and most of them we have held for more than 10 years. One example would be Big C Supercenter. The hypermarket group has 122 branches across Thailand, selling food, homeware, clothing and electricals. It has a unique position in a growing market. It is worth noting that Tesco’s largest operation outside the UK is in Thailand, operating around 1,400 stores. We also have exposure to this group in the portfolio via its property fund. We believe there is space for both groups to grow as consumer spending rises at a rate of over 7% per year in the country (http://www.tradingeconomics.com/thailand/retail-sales-annual).
We also hold some of the local banks, such as Kasikornbank. These are doing well from the increased penetration of retail financial services and have proved resilient through more turbulent periods for markets, unlike some of their international peers.
The Thai stock market as a whole has been one of the key beneficiaries of the recovery in emerging stock markets since the start of the year (http://www.bloomberg.com/quote/SET:IND). The benchmark SET index is up around 7.5% in 2016, outperforming the wider region and showing once again, that the market is relatively immune to any political turmoil in the country.
We believe that the Thai market has much to offer in the longer-term. For the time being, valuations are reasonable and Thai companies score highly on measures such as return on equity, corporate governance and dividend payouts. We see it as one of the most exciting opportunities in Asia.
Risk factors you should consider prior to investing:
- The value of investments and the income from them can fall and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
- Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
Other important information:
An investment trust should be considered only as part of a balanced portfolio. Nothing herein constitutes investment, legal, tax or other advice and is not to be relied upon in making an investment or other decision. No recommendation is made, positive or otherwise, regarding individual securities mentioned. This is not an invitation to subscribe for shares in the investment trust and is by way of information only. Subscriptions will only be received and shares issued on the basis of the current Key Facts document. These can be obtained free of charge from Aberdeen Fund Managers Limited, PO Box 9029, Chelmsford, CM99 2WJ.
Issued by Aberdeen Asset Managers Limited. Authorised and regulated by the Financial Conduct Authority in the United Kingdom.
A full list of the risks applicable to this investment trust can be found in the factsheet which is available at www.newthai-trust.co.uk