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Amid Credit Crisis, It's Fit to be Thai

After suffering through a vicious credit cycle, stocks there stand to surge.

In an uncertain global liquidity crisis, some say stocks in the country that only 10 years ago suffered the worst credit crunch of all may be poised to surge.

In August, year-over-year exports in Thailand rose 17.9% vs. a rise of 5.9% in July, while the country's trade surplus rose to $770 million from $211 million. And at the end of September, the Ministry of Finance revised economic growth for the year up 50 basis points to 4.5%, and at 31.64 vs. the dollar, the baht is climbing its way back up to its July levels.

The scenario is a far cry from 1997, when the baht dropped 30% overnight vs. the dollar and Thailand was thrown into a cash crisis.

The Thais are "continuing the healthy export momentum seen through the first 6 months of this year," says Adrian Foster, head of capital markets at Dresdner Kleinwort in Beijing. "Thai producers may start cranking up their production runs to meet demand from new production rather than inventories, which would be a positive for the overall economy."

In September, Bank of Thailand left rates unchanged at 3.25%, dismissing a move as "unnecessary," stalling equities. When the Bank meets again on Oct. 10, Asia commentators expect it to slash rates to quash political unrest and pass on the positive domestic economic growth to equities.

The argument goes that consumer price inflation was down on the year to 1.1% in August from 1.7% in July, creating the right conditions for a rate cut alongside relative weakness in Thai securities, which have yet to feel the effects of positive economic growth in the country.

The rate cut would most positively impact home builders and financial stocks, giving what many say is a long-overdue boost to the Thai stock exchange (SET) in general. In the last year, the SET has advanced 37% to 847.93, much less than other regional stock exchanges: in the same period, the Hang Seng has gained 65% to 27,066, the Korean Kopsi is up 54% to 2003.60 and the Shanghai Composite Index has soared 217% to 5552.3.

Although no Thai ADRs trade on American exchanges, two closed-end funds --

The Thai Fund


, advised by Morgan Stanley, and the

Thai Capital Fund


TST Recommends

, which is advised by Daiwa -- both trade on the NYSE. The Thai Fund has gained 50% from its low in mid-March to $13.60, while the Thai Capital Fund has gained 64% in the same period to $15. Both funds maintain that they are invested in a limited number of securities on the Thai market for the long term.

But investing in Thailand now is not without its caveats. "I agree that the market here is going to go up fast," says Charles Puntratanamongkol, a prominent Thai entrepreneur and real estate owner. "But the question is when it comes down. This is Thailand: it could drop as quickly as it goes up."

Still, Thailand's economic strength has been on the radar screen of international conglomerates for the past year, where they have been busy expanding investments.

General Electric

(GE) - Get Report

paid $624.5 million for 25.4% of Bank of Ayudhya PCL at the start of 2007, taking its stake in the bank to 35%, and at the end of July, Deutsche Bank doubled the size of its Bangkok operations to 18 billion Baht, or around $600 million.

"This significant increase clearly demonstrates the potential we see in the Thai market," said Colin Grassie, Chief Executive of Deutsche Bank Asia Pacific. "We see Thailand as an important growth market for us in the Asia Pacific region."

More recently, in September Dutch bank ING offered a purported $240 million for a 24.9% stake in Thai bank TMB.

Money managers are largely unconcerned by the political instability in Thailand. Some are saying it may induce the Bank of Thailand to make additional efforts to boost markets in order to create stability. (Thailand is currently under military control after a coup late last year ousted former Prime Minister Thaksin Shinawatre; elections are expected in December).

Others, such as James Brandt, a fund manager at Polar Capital in London, argue that politics and economics in Thailand are uncorrelated, and shouldn't deter investors.

"Key is to remember that Thailand has had more military coups and constitutions in the last 20 years than the emerging markets team has pairs of shoes. In other words, no one ever bought this place because of politics," he writes in an internal memo to traders. "We are maximum bullish, and adding."

Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at

. He lives in New York.