Thailand: Nomura focuses on equities

A sign of the optimism in southeast Asia, perhaps, is Nomura’s decision to start focused coverage of Thai equities, after years of lumping them into regional reports.

A growing number of brokers see Thailand as the comeback story of the year, as it bounces back from 2011′s disastrous flood crisis, with a predicted increase in GDP from near zero to 5-7 per cent.  Nomura is among them.

Despite a recent softening in exports, the broker’s timing looks good, following last week’s economic data, which saw Thailand exceed most analysts’ expectations with annual growth of 4.2 per cent in the second quarter.

In a report entitled,“Awakening after a lost decade,” Nomura says:

* After overinvestment in the 1990s led to crisis in 1997, Thailand has since been underspending on infrastructure relative to its needs and growth. As a result, the country is now facing many bottlenecks from transport to telecoms to power to flood control (as evidenced in the floods last year).

* That is about to change with the current government’s plan to invest THB320bn annually in the next few years. Around THB350bn of the flood prevention program will also kick in. Although exports will remain important to the economy, investment will be more visible going forward.

* Hence we are bullish on banks and building materials, as well as selected power names. We like the telecoms sector as Thailand builds out 3G. We are cautious toward sectors like retail that have benefited from the consumption boom fuelled by a populist government policies. Earnings turnarounds should also be a key focus.

Speaking of “populist government policies”, however, watch how the government plays the growing saga over its controversial “rice pledging scheme” under which farmers are being paid such high prices that Thai rice is now becoming uncompetitive on international markets.

Other dark spots on the horizon include an overall fall in exports, due partly to external factors such as slowdowns in the eurozone, the US and China. The government announced last week that first-half exports dropped 2.1 per cent in terms of value compared to the same period in 2011.

The government has been forced to lower its optimistic export growth projection for 2012 to 9 per cent from an earlier 15 per cent. The hoohah over that initial forecast – made by the smooth deputy prime minister and finance minister Kittirat Na-Ranong,  made the back-tracking all the more embarrassing.

A more realistic perspective prevails at the central bank, which has revised its export forecast to 7 per cent growth, while the National Economic and Social Development board, the official forecasting agency, is now predicting just above 7 per cent. The NESDB predicts overall GDP growth of 5.5 to 6 per cent – well below the administration’s 7 per cent figure.

As Nomura argues, these numbers are plenty high enough to create good opportunities in specific companies and sectors, particularly in stocks that could benefit from domestic investment. That’s a story that’s not unique to Thailand in south east Asia. Malaysia, Indonesia and the Philippines offer similar potential. In the global gloom, ASEAN is a bright spot.

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