Morgan Stanley has downgraded Thai equities into "underweight" or equivalent to sell/bearish last week for the following reasons (and, look the chart below to see how foreign fund has flown out of the country):
*Valuations are Rich*: MSCI Thailand’s overall absolute valuations both on a PER basis and P/B basis is +1 standard deviation from its long term average. Its P/B relative to MSCI AxJ is trading at a premium of 19%, which compares to the last 10 year average of 9% . *Investors are Hugely Overweight*: Based on EPFR data, FIIs are 669 bps overweight Thailand versus AxJ. This is the highest OW position in the past 10 years. Equity mutual fund contribution to the overall mutual fund industry increased from 10.1% and 16.8% in C2008 and C2009 to 19.1% in C2010. *Earnings Momentum is Likely to Mean Revert* Thailand’s current earnings growth momentum of 32.2% during the last 12 months is driven by a combination of: 1. Low negative real interest rates. 2. Government measures (fiscal stimulus and expansive monetary policy with populist measures) 3. Strong growth in farm incomes due to rise in commodity prices and 4. Strong recovery in global growth. We believe that Thailand’s growth momentum will likely revert to the mean in 2HC11 as interest rates rise and the impact of government’s expansionary policies wanes. We estimate MSCI Thailand’s EPS growth to slow from 32.2% in the last 12 months to 15.0% in C11 and 13.5% in C12. We believe that the market has already priced in the strong growth momentum as its P/B valuation is +1 standard deviation above the 10-year average. Hence, the risk-reward from the current level is skewed to the downside. *Rate Hikes Will Impact the Market* BoT began to increase policy rates in Thailand from Jul-10 and has since increased rates by 150 bps. Interestingly, our study during the last 20 years and 3 rate hike cycles indicates that rate hike cycles hamper Thailand’s equity market. The market’s performance during this rate hike cycle seems to be a significant departure from the historical trend. We believe that considering BoT may further tighten the policy rate by 25 bps by Jun 2011 (with upside risk to further tightening) and the strong trailing equity market performance, the risk-reward for the market is skewed to the downside. Along with Morgan Stanley downgrade of Thai equities, foreign investors are already heading for the door there as you may see below. [image: Thai Foreign Outflow (May 2011).png] '+'
<<Thai Foreign Outflow (May 2011).png>>
