Anti-government demonstrations on the streets of Bangkok came to a head last week as protestors attempted to storm the prime minister’s office and other state buildings.
After three years of relative calm in Thailand, the clashes in the capital have raised the spectre of renewed political instability and sent jitters through the markets.
For investors, the issue is whether this turbulence in southeast Asia’s second-largest economy is likely to prove short-lived or whether it could spark a deeper, long-running political and economic crisis. Many emerging market investors have already been spooked this year by concerns about the impact of the expected reduction in the level of bond purchases through the US’s quantitative easing programme.
Moreover, the memory of the Arab Spring uprisings in the Middle East is still fresh, and highlights the risk that a political and economic collapse in Thailand could result in contagion to other countries in the region.
The protestors, led by former opposition leader Suthep Thaugsuban, have called for the prime minister, Yingluck Shinawatra, to resign. They intended to replace her government with an unelected “people’s council”, alleging that her brother, the exiled former prime minister Thaksin Shinawatra, runs her government from afar. Mr Thaksin was ousted in a military coup in 2006 and fled the country before the end of his trial for corruption.
Ms Yingluck, who took office after leading the Pheu Thai Party to victory in the July 2011 general election, has resisted demands to step down. Although she remains popular with many rural voters, she has antagonised many urban and middle-class voters.
David Lebovitz, global market strategist at JPMorgan Asset Management, said the unrest is a reminder to investors of the “political risk premium” involved in emerging markets investment. In most of these countries, the political system is not as developed as in Europe and the US, he said.
“There is a possibility that social unrest could bubble up and you could see a political shock to the nation, which may have some economic side-effects. These things happen now and again, and very rarely do they result in a massive crisis,” said Mr Lebovitz.
James Syme, lead manager of the JOHCM Global Emerging Markets Opportunities fund, said the clashes in Thailand reflect a split between the rural poor and wealthier urban voters that has been evident for nearly 10 years, with neither side prepared to recognise the other’s legitimacy in winning an electoral mandate. This has resulted in a “governability problem” in the country.
That said, there has been a commitment to non-violence, argues Syme, with the police and army reluctant to get involved in the current clashes. “It is not even remotely the same level of political risk as in Egypt, for example,” he said.
In Mr Lebovitz’s view, the risk of widespread contagion from the current events in Thailand is much less than if they were taking place in the Middle East. He claims “different dynamics” were at play during the Arab Spring, notably a “religious undercurrent”, that allowed the unrest to spread to other countries in the region. The situation in Thailand is “much more contained”.
Mr Syme regarded Indonesia as a greater risk to the region than Thailand. It is one of a group of emerging markets, which also includes Brazil and Turkey, that look “quite stressed”. Indonesia has a current account deficit, and has suffered capital outflows, which has led to currency weakness, he said.
Mr Syme argued that it is a difficult time for some emerging markets, particularly in southeast Asia, as US bond yields are rising. For Thailand, which has run a current account surplus in recent years, the consensus forecast has moved to expecting a small deficit this year. “We are not expecting a political or economic crisis in Thailand, but it is a harder environment in which to have difficult politics,” observed Mr Syme.
He pointed to the Royal succession as another source of potential political risk in Thailand. The King has the admiration and affection of the country, but there are suggestions that his son may not command the same respect.
Mr Lebovitz highlighted the significance of investor sentiment, with recent months serving as a reminder that emerging markets are risky investments and investors need to do their due diligence.
“We are adamant that it is not just about buying a broad basket of emerging markets; it is really about evaluating companies within specific countries to make sure you are making a sound investment. Don’t just throw money at emerging markets,” he said.
Mr Syme observed that there are some good bottom-up stories in Thailand, although he is more cautious on domestic cyclicals such as financials, cement companies and retailers. Overall, he is neutrally positioned on the market.
Nevertheless, Mr Lebovitz does not regard the unrest in Thailand as a reason for investors who have remained in emerging Asian markets to run for the exit. “It is not the beginning of a long-run deterioration in the Thai economy. It is just a little bit of a bumpy ride at the moment as these things get sorted out,” he said.
On the contrary, he argued that the political unrest in Thailand, and also in Ukraine, can be regarded as “positive developments” from a “long-term fundamental standpoint” – even though it may not feel like it.
According to Mr Lebovitz, people want fairer and more developed governance. Such events are part of the transition process for emerging markets on their sometimes-painful journey towards becoming developed markets.
Indeed, Mr Lebovitz expects the markets of emerging Asia to begin to pick up as the economies start improving over the next few quarters.
