As worries continue to grow over many developing nations around the globe, some investors have decided to pull back and put assets to work in safer markets like the United States. This trend and the general risk off atmosphere as of late has pushed broad emerging market funds like VWO or EEM below their corresponding American benchmarks—by a pretty wide margin—in both the YTD and trailing one year periods.
Furthermore, many of the most popular emerging market individual country ETFs, such as those tracking nations like Brazil, India, or China, have struggled lately as well. Funds tracking these markets are all in the red in the trailing one year period, making many investors pause before putting more dollars to work in these shaky markets.
Yet while some nations have seen severe weakness in the developing world, a few have been able to hold up quite well and buck the negative trend in this important market segment. Particularly, those in the Southeast Asian markets have been doing a superb job, although over the past few years, none have been able to match the robust returns that were seen in the Thai equity markets (read Southeast Asia ETF Investing 101).
In fact, over the past three year period, the MSCI Thailand Investable Market Index Fund (THD) has added over 90% in the time frame, beating the next closest nation by over 2,000 basis points. If that wasn’t enough, the product is still a top five performing nation from a year-to-date look as well, suggesting that the country has not only held up well in the market uncertainty but has been a long term outperformer too.
Clearly, the country and its market have been on to something over the past few years and investors who are looking for a new emerging market would be wise to take notice. Below, we highlight some of the key points from both the fund and the nation in order to hopefully shed some light on why the Thailand ETF has been pretty much unstoppable over the past three years (see Three Overlooked Emerging Market ETFs).
Thai Market Trends
Thailand is still very much dependent on exports to power growth, relying on a number of Western giants as well as closer-to-home destinations to import its goods. Still, the country has a relatively low public debt level and a modest budget gap, metrics that are far lower than many of their more well-regarded peers in both the Asia-Pacific region and the West.
Thanks to this, Thailand has a decent number of policy tools still at its disposal, especially considering that the inflation rate is very moderate at about 3%. However, these tools seem unnecessary at this time, as the Thai consumer appears to be picking up the slack in the nation’s economy (read Forget European Woes with These Three Country ETFs).
In fact, growth is expected to come in between 5.5%-6% for the second half of the year despite the fact that export growth looks to grow at just 7.3%, according to Bloomberg. Furthermore, the country is planning to spend more than $60 billion on new infrastructure programs while it is also looking at other simulative bills as well. "Thailand is one of the more resilient economies compared with its Asian peers with regards to the risk and headwinds from the US and Europe," Philip Wee of DBS bank told the BBC's Asia Business Report.
All of this comes despite no real appreciation of the baht against the American currency over the past few years. Or, conversely, perhaps Thailand has seen such strong growth because it has had such currency stability in the post-recession world, helping to erase memories of the disastrous 1997 crisis, and showcase how far the Thailand economy has come since then.
Thailand ETF in Focus
This strong investment climate and robust consumer class has led the Thai ETF to hold up better than its peers in recent months, as well as over the past few years. However, the fund is still somewhat concentrated from both a sector and an individual security perspective.
Banks comprise roughly one-third of the total assets while energy companies makeup another fifth of the assets. Beyond this, basic materials, consumer staples, and telecoms round out the rest of the top five making up a combined 27% of assets.
Fortunately for Thailand, the country’s banking system is much more locally and regionally exposed than some of the nation’s peers in the region. This has allowed the country to ride the wave of the improved consumer picture while also benefiting from the sound fiscal position in many of the neighboring countries in the ASEAN bloc (read Five Emerging Market Infrastructure ETFs for the Coming Boom).
Investors should also note that the product has a pretty solid level of AUM and average daily volume, suggesting that bid ask spreads are relatively tight and that total costs will not come in much higher than the 59 basis point expense ratio. It also doesn’t hurt that THD has an annual yield of 2.6%, a level that is quite a bit higher than both SPY and VWO at time of writing.
So despite the fund’s relatively heavy concentration, the emerging market ETF still could be a solid choice for investors. The nation is still growing at a solid clip and it remains well insulated from many of the Western world’s woes (also see Frontier Market ETF Investing 101).
Although it does have some exposure via its exports to the West, the consumer class in the country is coming on strong which should help to balance out the growth profile of the nation. Add in the robust yield and the solid volume metrics of THD, and some investors could still find a winner on their hands with this nearly unstoppable emerging market ETF tracking the dynamic nation of Thailand.
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Author is long VWO.