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Emerging Markets Diversity – Thai Stocks for Profits

When it comes to your stock portfolio the recommendation is always diversification, diversification, diversification. Not only among industries, asset classes and market cap, but also outside of your own country. This can mean other developed nations such as Germany, Japan and Canada or it can mean those super risky and often super profitable emerging markets. One such emerging market is Thailand and since I am living here I have begun to take a closer look at the Stock Exchange of Thailand (Thai SET Index) with an eye to profits.

Current feelings about the growth and profitability of Thai companies is mixed as evidenced by this article at Bloomberg claiming Thai stocks may climb another 16% this year on consumption which is offset by another article at MarketWatch claiming political instability could keep the SET depressed. So what is an investor to do?

Honestly the political instability has been baked into Thai stocks for a very long time, even before the airport takeover in November of 2008 and the red shirt protests and riots in May 2010. Both events caused a very small drop in the SET of no more than 5% and this was quickly recovered. Even the flooding of last year which caused a 20% drop between July and October hasn’t caused long term issues and all the losses have been returned plus additional gains. In fact, the Thai SET is up some 9.2% already this year with little signs of slowing.

So, how does the investor in the West get in on some of these gains. Currently there are two ways you can invest. The first, and best is to come to Thailand, open a bank account and brokerage account and trade stocks on your own. Obviously the set up costs for this are extremely high, but you could consider it as your vacation and kill two birds with one stone. Small to mid cap Thai stocks are quite stable and pay healthy dividends in most cases. Current yields range from mid 3% to over 10% for stocks considered as small and mid cap.

Another benefit to trading Thai stocks directly is that the Thai stock market is still very inefficient and can provide you with opportunities to profit off these inefficiencies. Trading is dominated by local speculators who enjoy day trading in liquid shares. This can provide opportunities for the savvy investor to get into stocks at much lower levels than would usually be possible. While global funds do buy and sell Thai shares, they are limited to only the most heavily traded, meaning a good 70% of Thai stocks are overlooked by institutional investors. It is a known fact that out of 460 companies listed on the SET less than 100 are followed by analysts. This has created a value vacuum of high dividend companies who are not followed by any broker or fund.

An easier alternative is to invest in the only ETF tied to Thai shares; the iShares MSCI Thailand Investable Market Index Fund (Symbol: THD). You will find that the fund is heavily weighted towards large cap stocks in the financial services and energy sectors (52.34%), primarily because these sectors are the ones where you find the largest players in Thailand. In my opinion the utilities, industrial and technology sectors make for much better plays both for capital gains as well as dividends, yet these sectors combined make up just 6.25% of the ETF’s portfolio. Real estate can also provide outsized dividends here in Thailand and the ETF has just 2.25% invested in Thai real estate companies.

Fees for the ETF are average for emerging markets funds at 0.59% (industry average is 0.65%) and 3 year and 1 year average annual returns are 40.13% and -4.23% respectively. Note the loss in 2011 was primarily due to the flooding in the 4th quarter, as you can see the fund has bounced back nicely. The fund has only been in existence since 2008 so there is no data beyond this. So far in 2012 (through the end of February) the THD ETF has returned a very respectable 20.47% far outpacing the SET Index itself. Part of the ETF’s returns are in the form of dividends and the yield for 2011 was 2.49%.

I firmly believe you can make more money investing directly in Thai stocks, however given the amount of trouble and expense you would have to go through it may not be worth it to you. The iShares MSCI Thailand Investable Market Index Fund appears to give a very respectable second option, one that is quick and easy to implement into your own portfolio at home. Everyone needs diversification and allocating 5-10% of your stock holdings to Thailand could provide you with a nice boost to your portfolio.

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