Asia, without the jitters

Asian markets have been volatile as fears over a trade war and economic weakness mount
Thailand’s position as a regional hub has made it less vulnerable
Upcoming elections are providing positive news flow

By Adithep Vanabriksha, Senior Investment Manager, Aberdeen New Thai Investment Trust PLC

Asian markets have a bad case of the jitters. Investors have seen double-digit falls on many of their Asia holdings since the start of the year and markets are yet to regain their equilibrium.

There have been a number of concerns: US protectionism and an accelerating trade war threatens the ongoing growth of the Chinese economy, on which many Asian markets depend. As such, even those markets without significant US trade are caught in the cross-fire. There are worries that the Chinese economy may be slowing anyway. Investors have also been influenced by the weakness of emerging markets generally, as problems in Argentina and Turkey prompted fears of contagion.

However, to date, this is mostly a perception problem. Although the IMF warned that an escalation in the China/US trade war could reduce Asia’s gross domestic product by 0.9% over the next two years, it made no change to its forecast of 5.6% growth in 2018. If anything, Asia appears to be faring better than many developed markets, where forecasts were cut (1.).

For nervous investors, this may be little consolation and they may want to seek out those areas of Asia less vulnerable to the caprices of the US administration and global trade patterns.

Thailand has shown itself relatively immune, and the SET index remains in positive territory over one year (2.) (compared to a 21% loss for the Shanghai Composite (3.)). This is not just good luck. Its companies are regional rather than global, trading with nearby fast-growing Laos, Cambodia and Burma, rather than the global superpowers. Only around 10% of Thai exports go directly to the US. There will be times in the market when this is a disadvantage, but today it is a strength. Its position as a regional hub gives sufficient diversity, but less vulnerability.

This resilience has been seen in economic growth figures, which have remained stable at 4-6%. 5% is expected for this year with exports to neighbouring countries the strongest driver. The economy has been well-managed, has a current account surplus. As such, is not in thrall to the strengthening dollar that has proved so problematic for other emerging markets.

At the same time, while developed markets reverse political progress, with long-established democratic institutions coming under fire, Thailand is moving in the opposite direction. After years of military rule, Thailand’s King Maha Vajiralongkorn approved legislation in September allowing for the election of members of parliament and the selection of senators. It is expected that there will be a poll in May. Thailand has weathered its period of military rule well, but the announcement of a return to democracy has help support stock markets in recent months. It has also helped the currency. The Thai baht remains one of the few Asian currencies to have appreciated against the dollar this quarter.

Unusually for Asian markets, the Thai market also has a relatively strong domestic shareholder base. This has provided support for the local market at a time when international buyers are losing their nerve.

On the Aberdeen New Thai fund, we continue to take a cautiously optimistic approach. Much of our exposure is in consumption-related companies, which are distributing across the region, including Vietnam, Indonesia and the Philippines. More recently, we have been exploring companies benefiting from the growth of Myanmar, which we believe has much potential. We’re still at the research stage, but will invest when we find the right opportunity.

We subtly changed the trust’s mandate earlier this year, enabling us to include smaller, higher growth companies within the portfolio alongside an improved interim dividend. We have introduced three small stocks into the portfolio, all local businesses with a strong domestic franchise. We also continued to build our position in Krungthai Car Rent and Lease, as the car leasing business across Thailand continues to grow. There has been a notable increase in initial public offerings in the Thai market more recently and we believe some of these companies will ultimately be of interest.

At the opposite end of the scale, we have recently added national energy company PTT. This is the largest stock in the Thai index, but had some underperforming businesses within its conglomerate structure. It has moved those into separate companies, freeing up capital to invest in new business opportunities, including aviation, logistics and robotics, including a potential bid for a high-speed rail project. We believe its prospects are more compelling from here.

It is easy to take a one-dimensional view of Asia and this has been reflected in the recent behaviour of markets. We believe it is much richer and more diversified than investors expect. There remain plenty of opportunities for resilient growth for those willing to look a little deeper.

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