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A Test For The Thailand ETF

ETF Professor

The iShares MSCI Thailand ETF (NYSE: THD), the lone U.S.-listed exchange traded fund dedicated to Thai equities, is up 7.37 percent this year, a disappointing performance for a fund known to overshoot when broader emerging markets benchmarks rally.

Year to date, THD is trailing the MSCI Emerging Markets Index by almost 200 basis points.

What To Know

A national election in Thailand is slated for March 24 and concerns regarding the outcomes of the election could be suppressing THD's upside over the near term.

“Developments in the lead-up to Thailand's election on 24 March underscore the political cleavages that persist as the country returns to civilian rule,” said Fitch Ratings in a recent note. “We noted political uncertainty around the transition as a constraint to Thailand's 'BBB+' rating in our last rating review in December. As such, the rating already takes into account a sizeable degree of political risk. Renewed disruptions could have a material rating impact if we assessed that they were on a scale sufficient to have a negative effect on Thailand's economic outlook.”

Why It's Important

The $458.69 million THD tracks the MSCI Thailand IMI 25/50 Index and holds 118 stocks. THD turns 11 years old later this month and since inception, the fund has dealt with several bouts of domestic political volatility.

In some aspects, Thai party politics are similar to that of the U.S. Thailand's voters are often split along rural and urban lines.

“Thailand's politics have been dominated over the last two decades by tensions between parties aligned with former Prime Minister Thaksin Shinawatra, which derive their support from rural areas, and political parties with strong urban support,” said Fitch. “These divides have sparked a number of disruptive political demonstrations in Bangkok during 2006-2014 including coups against the government. There has been no major unrest since the latest period of military rule began in 2014, but political fissures remain and could re-intensify after the return to civilian rule.”

What's Next

The upcoming election will market another military-to-civilian shift in Thailand's government, but military rule has not been a negative for stocks there. Over the past three years, THD is beating the MSCI Emerging Markets Index by nearly 500 basis points.

“Our baseline expectation of smooth elections remains,” said Fitch. “However, the election outcome is highly uncertain. Moreover, risks of renewed political instability during the return to civilian rule are elevated, and may have been exacerbated by the events of the last month.”

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