COLUMN-Thai stocks worth a look, but be cautious

Tue Apr 16, 2013 3:13pm EDT

By John Wasik

CHICAGO, April 16 (Reuters) - Most emerging market talk focuses on BRICS - Brazil, Russia, India, China and South Africa - or maybe even TIMPs - Turkey, Indonesia, Mexico and the Philippines. But one sizzling emerging market that has not been adopted into an investing acronym is Thailand.

Thailand has been growing rapidly relative to sluggish Western economies. Like its Southeast Asian cousins Indonesia, Singapore and Vietnam, Thailand has a relatively young population and a growing middle class, and it is building infrastructure along with a commodities trade.

Thailand has had its political problems, including a coup, in recent years, but now it is focused on an export economy, driven by demand from China and India. Global investors are attracted to the country's cornucopia of natural resources such as alumina, cocoa, gas, oil and sugar. Some 60 percent of the Thai gross domestic product is export-driven, which also consists of autos, rice and electronics.

Thailand's GDP rose by almost 20 percent in the fourth quarter of 2012 over that same period the year before, bringing growth for the full year to 6.4 percent, according to the Bank of Thailand, which on Friday raised its projected estimate of this year's growth to 5.1 percent from 4.9 percent.

Domestically, the Thai government is applying a Keynesian stimulus to the economy through large infrastructure projects, paying above-market prices to farmers and raising the minimum wage, according to Patricia Oey, an analyst for Morningstar. The country is a major agricultural supplier and manufacturer for the world's most populous region.

It's not well known to most individual investors that Thailand has had one of the best-performing stock markets in the world during the past decade. Two closed-end funds that invest in Thailand offer the opportunity to get in on that growth: Thai Fund Inc and Thai Capital Fund. But I don't recommend them because of their high annual expenses of 1.46 percent and 2.1 percent, respectively.

Only one exchange-traded fund concentrates exclusively on Thailand: the iShares MSCI Thailand Capped Investible Market ETF , which has returned an annualized 27 percent in the three years through April 15. That compares to 5 percent for an Asia-Pacific (ex-Japan) index. The fund's annual expense ratio is 0.60 percent of assets.

Some of the fund's gains have been extraordinary: 81 percent in 2009, 57 percent in 2010 and 40 percent last year. It lost 4 percent in 2011, a sour year in general for U.S. stocks as well.

That compares to a roughly 5 percent annualized gain during the past five years for the SPDR S&P 500 fund - an ETF representing the largest U.S. companies - and almost an 8 percent annualized gain over the decade through April 15.

As a mostly passive vehicle tracking an index of Thai companies, the iShares fund employs a method for capturing 99 percent of the total value of the Thai stock market. The 90 stocks within the index include banks such as Siam Commercial Bank PCL, technology companies like Advanced Info Service PCL and energy companies such as PTT Exploration and Production PCL.

While the fund is probably the most diversified and least expensive way to invest in Thailand, it has drawbacks. For one thing, investors have been pouring money into it. It has gone from $600 million in assets in November to more than $1 billion, says Todd Rosenbluth, director of ETF fund research for S&P Capital IQ in New York. That means you run the risk of picking a market that's already too hot.

The fund is also top-heavy in financial services stocks, representing some 40 percent of the portfolio. Overconcentration in any one sector always elevates portfolio risk.

Indeed, the fund is so volatile that it has double the risk of the Standard & Poor's 500-stock index - not unusual for a developing market but a consideration when you are making your investment choices.

For instance, the fund may decline if China's growth eases because all commodities producers will see lower demand for their output. Any reverberations will also sting. Remember the "Asian contagion" some 20 years ago? That sank Asian currencies - including the Thai baht - and stocks in short order, burning myriad investors.

Beyond just volatility, there's diversification to consider. It's best to invest in a country like Thailand as part of a larger investment in all emerging markets, since any market can quickly turn south in today's hyper-connected world.

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