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Thailand might not be everyone’s first guess as one of the year’s runaway stock market winners.

But, in spite of the violence of eight weeks of anti-government demonstrations, and sizeable regulatory and policy risks facing investors, Thai equities have been a rewarding bet for those who bought into the country’s SET share index in January.

Since then, the stock market has risen 33.2 per cent, a gain which, for western investors at least, has been amplified by the appreciation of the Thai baht. The currency has risen 8 per cent against the dollar this year to trade at 13-year highs.

The SET is well ahead of the FTSE Asia-Pacific Index, which has fallen 0.3 per cent. Indeed, among Asian markets, only Jakarta, flying high on strong domestic growth and new-found stability, has out-performed Bangkok.

Thai stocks, however, no longer look as attractive as they did at the start of the year. The stock market trades on an average forward price to earnings ratio of 11.4 times, a discount to the regional ex-Japan average of 12.5 times but above its 10-year average.

“Earnings have grown by 30 per cent in the first six months, so the markets have just been keeping pace with earnings,” says Sriyan Pietersz, managing director of JPMorgan in Bangkok.

Foreign buyers have been the main driving force behind rising share prices. Since January, overseas investors have ploughed more than Bt42bn into the stock exchange.

About $2bn left the Thai equity markets in April and May during the anti-government demonstrations but most of that foreign cash has now returned. “I still believe there is some headroom,” says Mr Pietersz. He says that, as local bond yields are squeezed, more money will come into the stock market. He predicts that the SET, currently at 978, is likely to hit 1120 by next September.

Thailand’s economy is more exposed than most to export demand: some 65 per cent of gross domestic product is derived from exports. A 33 per cent rise in exports so far this year has boosted the economy. But few people think the rate of recovery is sustainable.

One analyst, who declines to be identified, points out that, even if there is a slowdown in exports, exporters are under-represented in the index and domestic demand has remained relatively strong. Political risk, though, is weighing on the market. Many of the social and political tensions that fuelled the unrest earlier this year remain unresolved. The constitutional court is due to rule in November on a political corruption case that could result in the dissolution of the ruling Democrat Party.

That has prompted some analysts, including HSBC, to recommend that investors be underweight in Thai stocks. “The build-up of foreign funds increases the likelihood of a correction when political tension mounts again,” HSBC says.

There is uncertainty, too, surrounding the baht and the possibility of capital controls. Although the currency’s appreciation is broadly in line with its regional competitors, its strength against the US dollar has worried exporters and raised concern about volatile and destabilising inflows as western investors look for better returns than those available in the US and Europe.

Mark Mobius, chairman of Templeton Emerging Markets Group, has described capital controls as the “death-knell” for emerging markets. Thailand has sought to play down the possibility that they could be imposed. But it has yet to rule them out.

Copyright The Financial Times Limited 2017. All rights reserved.

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