Aberdeen New Thai Investment Trust - The China effect

2010 has been an eventful year for the Thailand and the Aberdeen New Thai It (LON:ANW) . Whilst dealing with yet further political turmoil, the second largest economy in South East Asia has recovered rapidly from the global financial crisis thanks to its exports and heightened trade with China.  However swift currency appreciation and the prospect of further political unrest have provided a reminder that growth should not be taken for granted. 

Equity markets across the globe have rallied hard since the early summer and the Stock Exchange of Thailand (SET) is no exception. The index is up by 34% on the year (similar increase since May) and the share price of ANW has risen by 52% this year to £2.74. 

And it is not difficult to see why.  Last month, the Ministry of Finance raised its 2010 GDP forecast to between 7.3% and 7.8% (from the 5 to 6% range), stating that the economy will grow faster than any time since 1995. 

Political unrest has been a major theme in 2010 however since the pro Thaksin Shinawatra protests came to an end in Mid May, the economy has bounded ahead and Thailand's September exports rose by 21.2% year on year, hitting a record high at US$18.06 billion. With exports making up 65% of the economy, they are pivotal to the growth story and September's rise defied the expectations of economists who had expected the annual growth to ease sharply to 15% due to the strengthening of the Baht.

Since the introduction of the China - ASEAN free trade agreement export growth has primarily been driven by shipments to China, Asia and other developing markets as trade to traditional markets of the United States, Europe and Japan has been mostly flat. China is turning to Thailand for computers, computer parts, chemical products, plastic resin, rubber products, and tapioca products. And what's more as China's own export sector expands, demand for materials from Thailand is doing likewise.

Other economic indicators were also illustrative of an economy in rude health. Whilst exports are forecast to rise 25%, vehicle production which represents 11% of the economy is expected to increase by 66%.

However, the danger is that a strengthening Baht could upset this export led growth and with the currency reaching 13 year highs against the dollar this is a possibility. The currencies of many developing nations have been pushed up by a flood of foreign funds attracted by higher interest rates, strong economic performance and buoyant stock markets. With the competitiveness of its exports under threat, it was no surprise to see the Bank of Thailand keep interest rates at 1.75% this week after two successive rises.

As for political turmoil, there has been a timely reminder that the "red shirt" protesters are still alive and kicking and with no election date fixed a repeat of events earlier this year can not be ruled out.  Just over a week ago, thousands of anti-government "red shirts" demonstrated demanding the release of their comrades detained after this year's bloody protests. What is clear is that neither party has softened its stance and that the protesters' grievances have not been addressed.

This report was produced by Senior Research Analyst, Aamer Nawid