Thailand ETF Embodies New World Order

In theory, it should not be good news for a high-flying emerging markets ETF when the market tracked by the fund reports first-quarter GDP growth that was 2.2 percent below what was seen in the fourth quarter. Perhaps it should be even worse that the country's 2013 GDP forecast has been lowered.

Neither of those factors are holding back the iShares MSCI Thailand Capped Investable Market Index Fund (NYSE:THD) Monday. THD, which was sitting on a year-to-date gain of 11.6 percent heading into Monday's session, is up another 1.4 percent today despite some disappointing GDP news out of Thailand.

Thailand's National Economic and Social Development Board said the country's first-quarter GDP growth was 5.3 percent. That sounds good by the standards of the developed world, but that was also a 2.2 percent seasonally-adjusted drop from the fourth quarter, according to a Thai media outlet.

The National Economic and Social Development Board also pared its 2013 growth outlook to 4.2 percent to 5.2 percent from a prior forecast of 4.5 percent to 5.5 percent, citing a slow global economic recovery, sluggish growth in export prices and a strong baht.

All of that should be bad news for THD, an ETF that while impressive relative to the broader emerging markets universe this year, has had to deal with some domestic political controversy. However, in a sign of its strength and the rate-cut-a-week environment in which the market lives these days, THD is not being dragged lower by the slack GDP news.

The reason is obvious: With the strong baht weighing on Thai economic growth, it is widely expected that the Bank of Thailand will join the interest rate reduction club, a group populated by other emerging markets such as India and Turkey.

Last month, BoT lowered its inflation forecast to 2.7 percent, giving the central bank even more room to pare rates. With the baht hovering near 16-year highs against the dollar, export-dependent Thailand may have no choice to lower rates from the current level of 2.75 percent.

Forget the piddly 25-basis point cuts many central banks have recently been using. Royal Bank of Scotland is forecasting a 50-basis point reduction when BoT meets on May 29, according to The Nation.

"We think that, given tepid energy and commodity prices, inflation may stay manageable. This, coupled with slower growth, leads us to expect a rate cut instead of our earlier expectation of a 25bps rate hike by the second half of 2013," said RBS, The Nation reported.

Onshore swaps and yields on Thai sovereign bonds due 2015 declined as speculation of a rate cut increased Monday. It is THD that is on the receiving end of the rate cut anticipation ebullience. Already one of the top-performing ETFS of any stripe since the March 2009 market bottom, THD has pummeled the broader emerging markets universe this year despite clarion calls that that Thai equities are expensive.

That may be the case, but THD comes with often ignored point of allure. The ETF's one-year correlations to the iShares MSCI Emerging Markets Index Fund (NYSE:EEM) and the iShares FTSE China 25 Index Fund (NYSE:FXI) are just 0.54 and 0.48, respectively, according to iShares data.

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