Thailand

Given months of political turmoil in Thailand – and the country’s record
of 17 coups in 60 years – there was always a possibility that tanks would roll in again. Foreign investors, however, have not been too bothered by political risk, ploughing a net $2.8bn into Thai equities last year. The level of investment so far in 2006 has been similar, on an annualised basis, and represents more than a quarter of inflows into emerging Asia.

Although the stock exchange has been closed, currency and bond markets have so far shrugged off the intervention – after an initial fall of several per cent the baht recovered fully. The military, which has the support of Thailand’s monarch, appears to be committed to appointing a non military prime minister and holding elections within a year. Many feel that the removal of Thaksin Shinawatra, who attracted intense hostility from urban voters, is a positive event that in part offsets the trampling of the constitution.

That does not mean the outlook is bullish. The growth targets once pencilled in by Mr Thaksin have subsequently fallen back to earth. The economy is expected to expand by 4-4.5 per cent this year and next, pedestrian by emerging Asian standards. Domestic consumption and investment have fallen by the wayside in the face of a political vacuum.

Meanwhile, the decision to defer investments means companies have swollen retained earnings – which is tax inefficient, reduces stated returns on equity and raises re-investment risk. Earnings are forecast to grow just 2.5 per cent this year and 4.9 per cent next, on consensus estimates.

The slight market reaction indicates how badly Mr Thaksin was viewed. Thailand’s price/earnings ratio was already among the lowest in Asia. It will take some time for foreign capital markets to recover and the military’s commitment to democracy has not been tested.

If nothing else, the events of recent days are a reminder that markets are often cheap for a reason.