Investor Spotlight: A frontier market too far?

A foreign investor looking in, Jeremy O'Friel ponders Thailand's fortunes

"The currency crisis of 12 years ago does not feel long enough ago to be forgotten."

Of all the lessons learned from the credit crisis of 2008 and beyond, perhaps the starkest was that liquidity remains king. As Benjamin Franklin once noted – the only thing more important than return on capital is return of capital. It is within this mindset that one tends to examine the potentially lucrative markets of Southeast Asia from a hedge fund manager’s point of view, namely with one beady eye on liquidity, or rather lack of it.

Clearly, there are tempting reasons to be involved in Asia. The region seems, through a combination of solid oversight and historically high savings rates, to have avoided the banking crisis suffered in the supposedly more sophisticated parts of the financial world, leading bourses in such cities as Kuala Lumpur and Bangkok to within spitting distance of new highs. But fears linger and many in the investing community remain psychologically scarred by the ‘Asian flu’ of the 90s. Given the complexity of the instruments employed therein, the masters of the hedge fund universe remain even more reticent, and are unlikely to plunder countries such as Indonesia, Thailand or Vietnam until they see clear and sustained evidence of higher levels of liquidity and freedom from state intervention in currency and other markets. Looking specifically at the Thai situation, one must examine all three of the currency, fixed income and equity markets to ascertain what the prospects are for a further development of the market and what needs to happen in order to entice more foreign investors.

Clearly, Thai equities are on the rise, with inflows next year poised to hit THB100m and the SET having recorded again of a shade under 26% through time of writing, making it one of the best performers worldwide. Yet the concerns centre around three important features – concentration, size and political backdrop. With banks making up 5 of the top 10 issues by market capitalisation (Thanachart, Bangkok, TMB, Siam Commercial and Kasikorn), hedge fund managers perhaps feel that they would be better off looking elsewhere for diversification, whilst it is only thirty five years ago that the liquidity fell to sufficiently low levels that the Bangkok Stock Exchange - the predecessor to the Stock Exchange of Thailand – ceased operations. It was no surprise that Thailand failed to make the grade in being included in Goldman Sachs’ Next-Eleven (N11) list of countries to follow the BRIC nations into the big-time, even though Asian neighbours Vietnam, Indonesia, South Korea and the Philippines did. Finally, the riots of earlier in the year are still the first thing that observers from outside of the country think of when Thailand comes under discussion. One is bound to recall the civil unrest disruption was deemed sufficiently serious for the SET to temporarily close.

The currency markets are similarly viewed with distrust. Again, the currency crisis of 12 years ago does not feel long enough ago to be forgotten. The Thai (and indeed Malaysian) central bank have two clear goals – stability of exchange rates and low inflation – and are not averse to direct intervention and even the implementation of currency controls to achieve the former. As has been learned by many other countries such as the United Kingdom, providing artificial support or resistance for any particular currency can be an expensive and ultimately fruitless exercise. Yet in the absence of such intervention, the presumed march upwards of the Baht could damage Thailand’s export-led economy. The absence of such upside potential in the currency is another reason for hedge fund managers to look elsewhere for a bit of free carry whilst holding equity positions.

Bond markets are perhaps the most attractive place of the three to dabble. Ironically, the success of domestic fixed income securities sector owes much to the same crisis that scarred so many others. In the aftermath of 1997, the Thai banks were reluctant to lend to local industry and so companies turned to the bond market. The inevitable forces of competition over the next 10 years led to lower borrowing costs, longer-dated maturities and fixed rates to such an extent that local banks now find it difficult to compete. Unfortunately though, bonds will always play second fiddle to equities in terms of where hedge fund managers place their assets and so again, international speculative appeal is probably limited.

In summary then, it is fair to conclude that unfortunately Thailand is a country that is still viewed with a certain amount of scepticism. Until the international investor sees a lower concentration and higher volume in equities, coupled with more freedom of exchange rate, Thailand is likely to remain peripheral in the opportunity set of even the most daring emerging markets hedge fund manager.

Jeremy O’Friel is the Managing Director of Belmont Investments, founded in 2009 with offices in Dublin and New York. Registered with the CFTC and NFA as a CTA and CPO, it has entered into an exclusive agreement with Altegris Portfolio Management (APM) to distribute all funds originated by the firm to investors outside of the US. Jeremy regularly visits clients in Thailand including MBMG Group and can be contacted through the MBMG Group on info AT mbmg-international.com

APM, a Registered Investment Advisor with client assets of roughly $2.75bn, is based in California. Formerly part of the Man Group, independent since 2002, APM specialises in managed futures and hedge fund strategies, with links to managers such as William Eckhardt and John Paulson. 

MBMG Group is a personal and corporate advisory and research practice with offices in Bangkok and throughout Thailand. MBMG Group was a pioneer of hedge fund research and recommendation within Thailand, and advises clients on assets of over $165 million, invested in a diversified range of assets managed by leading global experts.

This article was first published in Business Report Thailand, Issue 1, October 2010.