Thai Tumble: Recession Wracks A Former Star ETF

In the good old days for non-BRIC Asian emerging markets ETFs, a period that end with the start of tapering chatter in the second quarter, the iShares MSCI Thailand Capped ETF (NYSE:THD) was one of the best developing world ETFs.

So impressive were the returns offered by THD and funds such as the iShares MSCI Philippines ETF (NYSE:EPHE) that it became befuddling to so many professional investors and pundits spent so much lamenting the poor performances of emerging markets ETFs earlier this year. All that while THD, EPHE and some others soared as BRIC ETFs tumbled.

Impressive performances by THD were nothing new. From the March 9, 2009 market bottom through the end of the first quarter this year, the fund surged nearly 400 percent, making a mockery of BRIC ETFs along the way.

Those were the glory days for Thai stocks and THD. Such times could be seen again, but these days, investing in Thailand can make a hard man humble. After posting GDP growth of six percent last year, Thailand has seen two consecutive quarters of contracting growth, the definition of a recession.

Obviously, a recession problematic for THD, but the situation is more confounding than the mere identification of slack economic growth. Thai exports have been crimped even at a time of economic recovery in the U.S. and the European Union, two prime destinations for those exports. Domestic consumption has not yet picked up the slack for the lost export volume.

Philippine stocks and EPHE have dipped as well and neither are short of critics, but it is strong domestic consumption that should help EPHE remain durable relative to rivals such as THD.

The end of large-scale government investment projects following the devastation caused by flooding at the end of 2011 has also been cited as a cause for the fall in domestic consumption, which accounts for about half of economic output, according to the BBC.

Infrastructure was supposed to be a positive theme for the Thai economy and THD this year, but political tensions and allegations of corruption against Prime Minister Yingluck Shinawatra hampered a $68 billion infrastructure spending spree.

That is unfortunate for THD because nearly 30 percent of the ETF's sector weight is allocated to groups that would stand to benefit from increased infrastructure spending.

There is another issue for THD to contend with. Thai banks are well capitalized. That is the good news, but loan growth has fallen for two consecutive quarters, coinciding with the country's entry into recession. THD allocates nearly 37 percent of its weight to financial services names, putting the fund among the ranks of Asia vulnerable to slowing loan expansion.

With Monday's 4.3 percent slide, THD has violated support at $75 and may not see another support level until the June lows below $68. And with today's loss, THD is down over 23 percent in the past 90 days, meaning the ETF is officially in a bear market.

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Disclosure: Author owns none of the securities mentioned here.