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Thailand Coup Threatens Equity Market Stability

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Political strife in Thailand has sent foreign investors to the exits.

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Political turmoil in Thailand could mean the region's equity market will lag behind its emerging market peers over the next year.

General Prayuth Chan-ocha, Thailand's army chief, will begin to govern a polarized country on Friday, a day after he seized power in a bloodless coup in an attempt to end six months of turmoil, according to Reuters. He initially launched his coup after a power struggle broke out between the royalist establishment and populist politician Yingluck Shinawatra. The political strife has invoked fear that serious violence and damage to Thailand's economy, Southeast Asia's second biggest, could ensue.

Soldiers detained politicians from both sides after General Prayuth announced his coup. The military censored the media, disbanded protesters, and imposed a 10 p.m. to 5 a.m. curfew on citizens. Yingluck was forced to step down as prime minister by a court two weeks ago, but still remained nominally in power until Prayuth took control. A meeting set for Friday with Yingluck and Prayuth could set the tone for Prayuth's rule as he tries to steer the country out of crisis and put an end to international criticism surrounding his military rule.

US Secretary of State John Kerry said that he did not see justification for the coup, which would have "negative implications" for ties between the US and Thailand. "The path forward for Thailand must include early elections that reflect the will of the people," Kerry said to the press. Statements of condemnation also came from France and the European Union, and Australia said it was "gravely concerned."

Thailand's gross domestic product contracted 2.1% in the first quarter of 2014, largely due to unrest, which has scared off tourists and affected foreign investor confidence. "This is quite different from coups we've seen earlier. This is a one-in-a-hundred-years type of political crisis," Ernest Bower, senior advisor at the Center for Strategic and International Studies, told CNBC.

When Thailand previously experienced bouts of political turmoil, business in Thailand was barely affected. This time, however, the economy is clearly suffering. Many analysts have slashed their 2014 economic growth forecasts. "If Thailand didn't have this heightened political unrest, the economy would have grown probably about 4-4.5% this year. Now we're looking at something between 1-2%," Thomas Byrne, senior vice president in the sovereign risk group at Moody's, said in a report.

The chart below compares the relative strength in the price action of iShares MSCI Thailand Inv Mrkt Index Fund (NYSEARCA:THD) over that of iShares MSCI Emerging Markets Index (NYSEARCA:EEM). A few weeks ago, as political strife between the royalist establishment and Yingluck was reaching its peak, Thailand's equity index began to show relative weakness against its emerging market peers. The relative strength indicator has now broken lower out of its multimonth holding channel, and looks to be on its descent towards yearly lows. On top of that, the indicator is about to experience a death cross, when its 50 day moving average crosses below its 200 day moving average, which usually entails a long period of downward price movement.

To reverse course, Thailand needs its new leadership to make correcting the economy a priority. With economic stability will come stability among the masses that inhabit Thailand. "They really need a government that can adopt a new budget and that can get the infrastructure spending up to the level they want it to be at. We think it's essential for the long-term competitiveness of the Thai economy," Byrne went on to tell CNBC.



Andrew Sachais' focus is on analyzing markets with global macro-based strategies. He takes into consideration global equity, commodity, currency, and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

Follow Andrew on Twitter: @MacroInsights
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