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The Indian stock market has been a darling among the emerging markets the last few years, but now it may be the languishing Thai market's time to shine, at least according to BCA Research.
Arthur Budaghyan, managing editor of BCA's emerging markets strategy, says that "all necessary conditions are now in place for equity market dynamics in these two countries to reverse." He expects the Thai market to outperform its Indian counterpart over the next 12 months (but not likely beyond that). Accordingly, his macro call is to be long Thai stocks and short Indian stocks over that period.
He starts from the premise that India has become "the most expensive market within the emerging markets universe, while Thailand is the cheapest."
He isn't the only observer to notice the high valuations in the Indian market. Pablo Salas, manager of the CI Emerging Markets Fund, calculated that the Thai market is trading at around 9.6 times estimated 2007 profit, while the Indian market is about 19.7 times. The gap remains wide even if 2008 projections are used.
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His fund has about 5.3 per cent in India and 4.7 per cent in the Thai market. Given that the Indian market is much bigger and accounts for about 6 per cent of the MSCI Emerging Markets index while Thailand represents 1.4 per cent of that index, the fund is actually underweight India and significantly overweight Thailand.
"We are finding a lot of attractively valued, good quality companies in the Thai market," Mr. Salas said. He added that the Indian market is "very interesting," and although there are some pretty attractive companies there, valuations are at a point where there could be significant downside in some of the stocks if the Indian market slows.
Stuart Parks, portfolio manager on the AIM Indo-Pacific Fund, also has concerns about valuations in the Indian market.
He thinks that the market is at the upper end of its valuation range and that growth needs to come through to support those valuations. "We believe this may be difficult to achieve as there seems to be a huge amount of capital investment just starting up in India, and that is likely to lead to corporate earnings disappointment."
The Bombay Stock Exchange Sensitive Index (Sensex) returned 48.8 per cent last year, following returns of 44.6 per cent in 2005 and 15.4 per cent in 2004.
Contrast those returns with that of Bangkok SET Index. It declined fractionally last year. In 2004, it also lost ground, falling 10.5 per cent. In 2005, it made it into the plus column, with an 11.3-per-cent return in local currency.
But high valuations are not the only factor prompting fund managers to be wary of the Indian market. Inflation concerns are another, Tim Leung, manager of Investors Pacific International Fund, said.
He noted that broadly defined money supply was up 21 per cent in March compared with a year earlier, and wholesale prices ahead 5.7 per cent in March from a year ago. The Reserve Bank of India is taking "increasingly aggressive steps to slow down credit growth."
But what about the Thai market? Why are investors not plowing into that market in droves, given the attractive valuations? Mr. Parks said "the political situation is far from clear and we cannot rule out the possibility of the situation worsening considerably in the coming months." Mr. Leung noted that the Thai economy is not showing the kind of momentum that India and China are.
But Mr. Budaghyan argued that "sluggish growth is not a reason to become bearish on stocks."
"In fact, great buying opportunities for stocks usually occur in recessions and, similarly, robust growth is often associated with peaks in share prices," he said.
In his view, inflation is more important to the performance of the equity markets. If strong economic growth doesn't lead to higher inflation, then prospects for stocks are good, he said.
Inflation in Thailand has plunged. And "the soaring Thai baht will likely force the Thai authorities to aggressively cut interest rates," Mr. Budaghyan said. That would be a plus for the markets.