Thailand ETF Slips on Rate Cut - ETF News And Commentary
May 30 2013 - 12:35PM
Zacks
Given the recent rate cuts by Europe, India, Australia, Israel,
South Korea and Turkey, Thailand has no choice but to catch up with
this trend in order to boost its economic growth and guard against
appreciation of baht.
Thailand, the second most populous Southeast Asian country, is
one of the more resilient economies compared with its Asian peers
with regards to the risk and headwinds from the US and Europe. The
economy has led the way in the Southeast Asian markets in 2012 and
has managed to grow at an impressive rate even during economic
uncertainty.
However, when the other economies gained strength this year,
Thailand gave the impression that its economy may be lagging
somewhat (read: Can Anything Stop These Soaring Southeast Asia
ETFs?).
What Went Wrong?
The Thai economy grew only 5.3% in the first quarter, below the
expected 6% and much lower than 19.1% growth in the previous
quarter. Like some other Asian nations, Thailand was hurt by weak
exports and tepid domestic consumption.
Last week, the government of Thailand reduced the GDP forecast
for the economy from 4.5%–5.5% to 4.2%–5.2% for 2013. It also
slashed the 2013 export growth target to 7.6% from 11%. This
comes in the wake of a strong currency, baht, which is making
exports expensive.
In fact, the baht has appreciated as much as 6% against the U.S.
dollar so far in the year, though it has fallen a bit in recent
days due to a strong U.S. dollar (read: Is the Dollar ETF About to
Surge?).
In this environment of slow growth and a strengthening currency,
the central bank of Thailand took the initiative of cutting the
benchmark interest rate in order to boost the country’s economy,
which is heavily dependent on exports for growth. This was the
first cut made by the bank this year, pushing the rate down to
2.50% from 2.75%.
ETF Angle
Investors have only the pure play option – iShares MSCI
Thailand Investable Market Index ETF (THD) – in the space,
which provides broad exposure to Thailand equities. Though the
Thailand ETF has been among the best performing ETFs in the
Southeast Asia space gaining nearly 12% in the year-to-date
timeframe, the rate cut has pushed THD down by nearly 2% in a
single trading day.
The product seeks to match the price and yield of the MSCI
Thailand Investable Market Index, before fees and expenses. Holding
94 stocks in its basket, the fund is still somewhat concentrated
from both a sector and an individual security perspective.
Financial comprises roughly two-fifths of the total assets while
energy companies make up another fifth. Beyond this, materials,
telecoms and consumer staples round out the rest of the top five,
making up a combined 28% (read: Two Sector ETFs Posting Incredible
Gains). From an individual holdings perspective, the product puts
about 51% of assets in top 10 holdings and focuses on large cap
securities.
The product has managed assets of over $1 billion so far this
year. The fund has a pretty solid level of average daily volume,
suggesting that bid/ask spreads are relatively tight and that total
costs will not come in much higher than the 60 bps expense ratio.
THD has an annual yield of 1.59% (see more in the Zacks ETF
Center).
Bottom Line
Despite the fund’s relatively heavy concentration, the emerging
market ETF still could be a solid choice for investors. THD
currently has a Zacks Rank # 1 or Strong Buy rating, suggesting it
would continue to outperform over the next one year period (read:
Zacks ETF Rank Guide).
The ETF has been on the downside in the last few days due to
sluggish first quarter growth and rate cuts. In fact, this poor
performance has sent the fund’s return below the SPY
year-to-date.
While the interest rate cut was widely expected, many were
hoping for a 50 bps reduction instead. So, at least part of the
reaction could be due to the lack of a bigger cut to hold down the
baht.
Still, we believe that lower interest rates will take at least a
few months to improve the economy, and that THD could face some
weakness in the near term. Beyond that though, the fund could rise
once more, and continue to lead the Southeast Asia ETF world
higher.
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GLBL X ASEAN 40 (ASEA): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
ISHRS-MSCI THAI (THD): ETF Research Reports
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