Emerging Markets Diversity – Thai Stocks for Profits
When it comes to your stock portfolio the recommendation is always diversification, diversification, diversification. Not only amongst 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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Great Article, without a whole lot of money to work with, I really like dealing with ETF’s , they are proving very beneficial in my meager little portfolio
It is nice to have an international perspective.
I really like ETF’s too, for the diversification aspect. I am going to start getting into individual Thai stocks though, many of them trade for the equivalent of $1-2 and I rarely see any much above $15. Means you don’t need a whole lotta money to get started.
well do not forget to diverisfy beyond paper! LOL
I have some individual stocks too but one is so far a huge loser for me LOL my ETF’s are far outperforming my individual picks.
Hi Steve,
Very interesting article, and I’m looking forward to following up on this post with you
and reading more of your articles on this
area of the world economy.
I would say 10% of your holdings in what I would still consider a “risk” market would be quite high. But as you live in Thailand you have an edge on which companies are more solid plays, and a better understadning of the relationship between government and industry etc. It makes sense in your case. Don’t forget those nice solid U.S. Blue Chips!
There is likely a reason why institutional investors my be avoiding the SET – do they feel it has too much risk? Or does the government have restrictions on foreign ownership?
Maybe 1 or 2 stocks to try it out. My discount broker at TD Waterhouse does trade on international exchanges, but the costs and commissions may be quite higher, but then so is the risk/reward ratio. On the other hand, getting into an emerging market and investing in good companies can pay hefty rewards, if you understand the local economy.
Very interesting!
Cheers
Typically I would agree with you, but since this is my country of residence I think as much as 20-25% invested here could be suitable. I don’t necessarily buy into the idea that to be diversified you should have 80% in US equities and only 20% in foreign equities. Last time I checked the US did not command 80% of the world’s GDP.
Let me know about the fees from TD Waterhouse. I’m guessing it might be more expensive than it is worth to trade Thai stocks from outside Thailand, but I could be wrong.
Emerging markets go hit pretty hard in 2011. That means they are a great buying opportunity. I don’t think I will be flying to Thailand anytime soon, but will definitely look to see if any emerging market ETF’s have any Thai stocks in them.
One of my favorite things is the Callan Chart. It shows all the different returns for markets and indices.
https://topforeignstocks.com/wp-content/uploads/2012/01/Callan-Chart-2011.png
Interesting chart, I’ve never seen that one before. It is kind of limited though, I think I would like to see more indexes represented to get a true picture. I did find it interesting that in many years the S&P/Citi 500 and the MSCI Emerging Markets are polar opposites.
Yes you might as well invest where you live since you would have an advantage over foreign investors. Just make sure you are not taking too many risks. Since the area is prone to natural disasters, you don’t want to get hit too hard when the next earthquake or tsunami happens.
Thankfully there are few earthquakes here and tsunami’s primarily hit the tourism industry (they’ve only had the one in recent memory though). Flooding is always an issue though during the monsoon season. I am looking to minimize risk by focusing on well capitalized dividend paying stocks.
Here’s one way to play it through iShares THD, albiet a lower yield at 2.78%. But with 86 stocks, that likely makes it a safer play:
https://us.ishares.com/product_info/fund/overview/THD.htm
Cheers
The Dividend Ninja
2.78% isn’t too bad in our current rate environment. The diversification does make it safer for sure, but seems it hurts returns somewhat. The best dividends are in the small to medium sized companies that aren’t followed by analysts and thus have no institutional sponsorship.
I have THD as one of the options in my TAA portfolio, and checking just now, the Thailand index is the top performer of those I follow in the Foreign Emerging class. There has been a lot of research that using relative strength models and moving averages, a top 5 (or 4, 3, 2, or 1) gets very good returns, and with less volatility than the market. Take a look at mebanefaber.com, he just put up a half hour video explaining some of the ideas.
That’s great the THD is doing so well for your portfolio. I had no idea it was one of the tops in the emerging class. Also ironic you mention relative strength models because I have been working on a medium term trading strategy based on RSI. It’s actually a very good signal for the Thai markets anyway.
Good article. Thai investments are definitely worth considering.
For those living there: I get concerned when I see people encouraging novice investors (often with their money sitting in a bank account to that point) to start direct trading Thai shares. For those ppl, an investment in a Thai ETF is usually a better way to go because of the risk of taking a hit.
There are also some great Thai mutual funds and (despite a common perception otherwise) the fees compare favourably with other countries – see
https://corporate.morningstar.com/us/documents/MethodologyDocuments/ResearchPapers/GlobalFundInvestorExperience.pdf (refer in particular to page 43 and pages 133-137).
Further, if you are actually working in Thailand then you really should investigate the tax benefits of Long-term Funds (LTF).
For those living elsewhere: The THD option you mention is good for some people. Others might benefit from investing in a well-chosen mutual fund/s offering Thai exposure as part of a bundle of Asian assets.
Readers interested in delving deeper into the world of Thai investments might be interested in my book “Your Investment Guide to Thailand” available via amazon.com
Thanks for the great addition to the original article Bruce. I think that most people living outside Asia are pretty unaware of the investment options available in this part of the world.
Hi Steve
Great site you have here, just found you early this morning.
I’m from US and wanting to start investing for our 3 yr old Thia daughter.
10,000 baht dollar cost averaging for next 20 years, and always reinvesting the dividends.
Was thinking of
Thai Tap Water Supply TTW:TB
Detac
What are your thoughts on some great long term stocks at the moment?
Do you know better ones?
Thxs
Jer
I’m still in the research process, but TTW is one that is definitely on my radar. I also like MBK, SIRI and EGCO for long term dividends.
Oh sorry, forgot to mention we do live in Thailand and I used to own stocks that I always used, like Walmart. So I’m sorta/kinda a believer in perhaps buying into stocks that I use regulary.
Jer
WOW I keep leaving details out, that’s 10,000 baht a month for twenty years!
10k a month for 20 years should give you enough to buy some of the Thai universities! Last I checked tuition for Thai citizens is pretty darn reasonable. Of course, the degree isn’t useful anywhere except Thailand
If you are planning on using it for a college outside Thailand be careful with the funding of your stock holdings here. You need to have a clear trail showing the money came from outside Thailand if you want to repatriate it at some point. We’ve set up a separate account specifically for transferring investment money into Thailand so there is no question where the money came from when it is time to repatriate.
Great site. We’re looking at retiring to Thailand in about 3 years, and I’m interested in moving some of my investments into the SET as a currency hedge. How onerous are the US tax reporting requirements under the new laws? Can it all be done online or do you have to mail your reports to the US? Is it easy to trade online with Thai brokerages? I’d be interested in reading more on this subject.
I bought a few hundred shares of TTF (a closed end fund invested in Thailand) about 10 years ago. I wish I’d bought a lot more! Up 225% over the decade and yielding 3.3%/year.
Hi Gary,
We haven’t jumped into investing in individual Thai shares yet so I can’t comment on the reporting requirements or the online trading. Rest assured once we do jump in I’ll write it up here!
That’s a great yield and return on the TTF!