The Daily Update - Thailand's 'Progressive Prosperity'

In its article titled “Riding the Wave - An East Asian Miracle for the 21st Century”, the World Bank upgraded Thailand to a “progressive prosperity” country, having “eliminated income poverty while substantially increasing the share of middle-class households.” The article also goes on to highlight that “A wave of prosperity has spread across East Asia. Today, three of five people can be considered economically secure in that they face a very low risk of falling into poverty. A solid middle class has emerged in most countries.” Meanwhile, Thailand's economy has expanded at its fastest pace since the first quarter of 2013, with Q3’17 GDP at 4.3% yoy, up from 3.7% yoy; a pick-up in exports and tourism supported growth.

As regular readers are aware, at Stratton Street we only invest in countries with strong Net Foreign Asset (NFA) scores (as a percentage of GDP); we have a self-imposed three star cut-off (i.e. NFA cannot fall below -50% of GDP). On this measure Thailand passes with flying colours, as our model assigns the country with 4 stars, (i.e. NFA between -25% and +25%). The country also has a Baa1/BBB+ investment grade (IG) rating, so sits comfortably within our investable country universe. However, we are also value investors and Thailand does not score so well on this measure.

From a relative value perspective, the ~45 IG, hard currency bonds in issue in Thailand offer little in the way of spread cushion. We had previously held Bangkok Bank 5% 2023, at a spread of 235bps over Treasuries, which we calculated back in 2013 was two notches cheap for an A3 rated issue. Currently, however, the bond - which trades at a spread of 85bps over - offers only 2.1% in terms of expected return and yield, and the market is actually pricing the Baa1 bond, as an A3 rated issue; as it is over 1 notch expensive. Even, if we look further along the Bank’s curve, at the 9.025% bond maturing in 2029, the Baa2 rated bond is 1.5 notches cheap and has an expected return and yield of 8.2%; the issue size is also only USD 450 million, so again not one for us. We'd rather lend to Aa2 rated Kuwait Government, via the USD4.5bn 3.5% 2027 bond, which has an expected return and yield of 6.5% and is over 3 notches cheap; i.e. the market is pricing the bond as a A2/A3 issue.