CHAPTER 6
Thailand
SO MUCH FOR POTENTIAL
Thailand is possibly the best positioned to be a Tier 1 emerging market. It has a strong capitalist bent, a functioning and established stock market, decent infrastructure, a world-class metropolis in Bangkok, a booming tourism business, a strong port system, and a friendly and welcoming population with a history of modern independence from foreign rule. I could have written the same thing 20 years ago.
Therein lies the problem and why Thailand may never gain Tier 1 status. For as long as I can remember, Thailand has been the one to watch in Asia. It has seriously underdelivered. I commented to an audience once that “some emerging markets will always be emerging,” and I truly believe that Thailand is one of those.
There’s a joke I use on occasion when talking about Thailand. It goes something like this: “What do the Thais call a coup? An election.” Since 1932, Thailand has witnessed 10 coups and 7 aborted attempts. Most recently, in 2006, the government of corrupt billionaire Thaksin Shinawatra was overthrown and he was forcibly exiled. Shinawatra came to power on a Peronist, populist platform and proceeded to enrich himself and his cronies. But the story does not end there. Fast forward to 2011 and Shinawatra’s sister Yingluck Shinawatra was elected prime minister, again running on a populist platform. Thailand, like many Tier 2 emerging countries has a history of faux political instability. I say faux because the instability in the system is actually expected, much like it is in Argentina. And, like Argentina, Thailand is a country split in two—the haves and the have nots. And, the have nots tend to vote more.
One Night in Bangkok
Thailand is one of the most predictable markets in Asia, however, and the tool to use is the Stock Exchange of Thailand (SET). Let me explain. Before I visited in 2011 the Western media was reporting on violence in the streets of Bangkok. The Thai red shirts, representative of supporters of Thaksin (few doubt that he is still calling the shots, albeit through his sister) wanted him back in power. To make their displeasure clear, they rioted in Bangkok resulting in harsh military and police response leading to many deaths. The opposition yellow shirts are supporters of whoever is against Thaksin and the Shinawatras. I did not make the decision to go to Thailand based on the news media reports but based on the reaction in the SET. It was stable and that’s all I needed to see. Upon arriving at Suvarnabhumi Airport, I could clearly see that it was business as usual. Most of the rioting was occurring in parts of the city that I was not planning to visit and really in such small areas that even the rest of Bangkok’s population did not seem worried about it. Now, in the past, when there were real mass riots in the streets and the government brought in tanks to squelch the protestors, the SET would plunge by 20 to 30 percent overnight. Of course, I also consulted with two of my friends who either lived or had family in Bangkok for good measure. They sounded the all-clear as well, despite media reports.
Bangkok is a fabulous city. It doesn’t sleep. It has diverse neighborhoods populated by every possible ethnic group on the planet. Shops, stalls, restaurants, and, of course, the red light districts are full of people all the time. It’s a safe city, as well, with little serious crime. The city has a great overhead light rail system that you must use to avoid the heavy traffic that is present at all times. A word to the wise: Use the bathroom prior to getting into a car. You will invariably get stuck for an hour or more in traffic on some days. The Chao Phraya River (loosely translated as the River of Kings or Dukes) runs through Bangkok before emptying into the Gulf of Thailand. It’s quite wide and navigable by all manner of craft, including long riverboats that make for a great transportation option. I know this both from riding in them, which was a blast, and also from having watched a day’s worth of activity from my room at the Shangri La in Bangkok, recovering from a rare case of food poisoning. Strangely enough, it was the first time that I have ever gotten sick on a trip anywhere. Worse still, I ate the tainted food in a Lebanese restaurant that my local friend and college classmate, Jay Werba, took my colleague Chris Pillow and me to for dinner. Thanks, Jay! Nobody else in our group got sick, which makes the whole situation even more baffling. Next time I am sticking to the delicious Thai food!
One night after dinner we visited one of the red light districts that Thailand is famous for. Of course, I did not partake in any illicit or illegal activity. On the way to Patpong (a district that is more oriented toward foreigners) the streets are lined with little stalls selling Viagra and Cialis. Patpong is named after the Patpongpanich family, who owns most of the property. It’s located between Silom and Surawong Road and exudes a carnival-like atmosphere. Strip clubs and bars line the streets as far as the eye can see, and if you’re a man, you will be tugged at incessantly by beautiful Thai girls inviting you to enter their establishments. They hang out in front of each joint in small posses, dressed alike, usually in Dallas Cowboy cheerleader-type outfits. Walking up and down the street are hawkers selling everything from fresh fruit to insects on a stick.
Of course, as part of my research, I had to spend some time at one of these clubs. Inside the good clubs, the surroundings are spotless. You are not pressured in the least to do anything or buy a hundred drinks. Most of the patrons are older Americans or Europeans. And, all of the girls are young and Thai, usually from the countryside. Prostitution is illegal in Thailand—at least that’s the running joke. These businesses had no lack of traffic and the goal is ultimately for the girls to find a foreigner and ply her wares. It’s not a secret and it’s not done in some back alley. It was plain to see. We stayed for a couple of hours just to people watch—it was a sight I will not forget.
At 2 a.m. we hopped in a cab and headed back to the hotel. There are some cities where taking a taxi is an adventure unto itself. Bangkok is not one of those places. Unlike Istanbul or Athens where I am always on the lookout for supposedly broken or already running meters, Bangkok was quite normal. However, a female friend of mine who was there a few days prior to me was not as complimentary about being treated fairly outside of Bangkok when it came to transportation. Female travelers who travel unaccompanied in many emerging markets have said the same. It’s always a good idea to deal with reputable companies recommended by your hotel, even if it costs more. Unless you can speak the language fluently, you will find yourself in dire circumstances sooner or later.
I can remember it clearly. I was in my hotel room at the Regent in Hong Kong (now the Intercontinental), when the news of the collapse of the Thai baht came on the TV. It fell by more than 20 percent in one session, and what was once thought to be a localized currency issue for Thailand (the actual crisis for the currency began in May of 1997 when Thai banks came under speculative attacks by investors and Singapore came to its aid), turned out to be much more than that. For years prior to the collapse of the baht and the Thai economy, the country’s banks had loaned out billions to the investment community fueling a speculative bubble, especially in real estate. When that bubble burst, much like it did in the United States during the period from 2007 to 2011, the markets broke under the weight of bad loans and insolvency of the banks. The crisis spread to the rest of Asia and when it was over, many countries found themselves debtors to the International Monetary Fund, which bailed them out to the tune of $40 billion, upon promises of strict austerity measures.
Thailand and much of Asia suffered several years of depressed economic growth until rebounding in the early part of the next decade. Recapitalized and with stricter lending standards in place, the Thai economy rebounded and the country went back to worrying more about politics. During the crash, it was not difficult to buy Thai equities, as well as those of Indonesian and Filipino countries, for discounts approaching 70 percent. If there is a lesson to be learned about emerging markets, this is it: When they crash, they crash hard and they crash fast. Liquidity dries up overnight and market routs are the norm. That is the time to buy.
Today, Thailand is growing its GDP at a 4 percent annual rate. It’s been doing so, on average, for the past five years. Per capita income is between $5,000 and $6,000 depending on the source you use. That puts Thailand far ahead of countries like India, China, Vietnam, and Cambodia but still not even close to developed nation status. But, and this is a big but, the black market is rampant in Thailand, Bangkok in particular, and many transactions are done in cash with no trail for the tax collector. It is the same for most emerging market countries, and it is a problem that will plague them for decades to come. Corruption is rife in Thailand and it comes from the top. Corruption in recent times hit its highest level under the first Shinawatra, with kickbacks of 5 percent or more on projects being the normal starting point.
Thailand’s population base of some 67 million and its strategic location as a developed cargo port and hub have allowed it to become a substantial trading partner (in Asian terms) with many of the neighboring countries. Thailand’s major export is rice. While not even close to being the largest producer (China and India are the two biggest, but most of it is for local consumption) it accounts for more than 28 percent of the rice exported globally. Tourism is extremely well developed, and Thailand’s beaches and islands are world famous for their beauty and resort accommodations.
Investing in property and property-related companies has historically provided the best investment gains in Thailand, followed by bank stocks, telecom stocks, cement stocks, and food companies. Thailand is also one of the largest producers of after-market automobile and electronics parts, but those businesses are highly commoditized and face major competition from other Asian countries. In truth, the type of companies that you want to invest in are those that serve the local market. Thai company shares are not hard to purchase, and some trade as American Depositary Receipts in the United States. But, as with every other emerging market, you are better off waiting for a crisis in Thailand and buying a Thai fund such as the Thai Capital Fund (NYSE:TF), Thai Fund (NYSE:TTF), or the MSCI Thailand Investable Market Index Fund (NYSE:THD). My rule of thumb is to start buying in tranches when the discount to net asset value (for TF and TTF) increases to over 25 percent—it’s like buying a dollar’s worth of shares for 75 cents or less. You can get quotes for the net asset value and the discount to that value by visiting the Closed-End Fund Association website at: www.closed-endfunds.com/.
Strengths
Thailand has a history of independence and an outstanding location with access to rivers and oceans. It is located in the fastest growing region in the world with close proximity to China and India. It has a fully functioning stock exchange and is well-known to the West.
Weaknesses
There is much political uncertainty. Nepotism is rampant and the population possesses a questionable work ethic compared to neighbors. There is a lack of willingness to cross the divide to developed nation status. Poor tax collection. Bangkok, the largest city and the center for commerce, has an overburdened infrastructure. The cost of doing business is slowly pricing Thailand out of the emerging market category.
Opportunities
Thailand has the chance to be the regional powerhouse behind China. It either borders or is within an hour by plane of Vietnam, Cambodia, Laos, China, Singapore, Burma, Malaysia, and Indonesia. It has the potential for increased agriculture production—especially rice. Its tourism industry is strong thanks to ample shoreline and resorts in the South and historical cities inland.
Threats
Thailand’s neighbors have less expensive workforces. Corruption is rampant and political discord common. The country has a strong populist movement and a history of coups as well as a poor reputation for upholding women’s rights. Religious tensions are rising from the southern part of the country where separatists have been waging frequent uprisings. The country’s inability to make the move to developed market status after decades of independence and trade with the rest of the world could ultimately hurt prospects for the Thai economy as hungrier regional competitors emerge.