Thailand ETF Prevails Despite Shaky Bank Loan Issues

As was the case in previous periods of emerging markets strength, Thai stocks and the iShares MSCI Thailand Inv Mrkt Index Fd (NYSE:THD) are excelling this year as broader developing markets benchmarks rebound.

The lone dedicated Thailand ETF trading in New York is up 27.7 percent year-to-date, more than double the returns of the Vanguard FTSE Emerging Markets Stock Index Fd (NYSE:VWO) and the iShares MSCI Emerging Markets Indx (ETF) (NYSE:EEM), the two largest emerging markets exchange-traded funds by assets.

Investor Concerns

Although THD has been a juggernaut among Asia single-country ETFs this year, there are some issues investors should acknowledge and those issues are affecting other emerging markets. Namely non-performing loans. THD, like many single-country emerging markets ETFs, is heavily allocated to the financial services sector.

In this case, the Thailand ETF devotes 26.6 percent of its weight to financial services names. However, that does not present investors with nearly the banking risk that is found in the comparable China ETF nor is Thailand's loan problem nearly as pressing as China's loan issues.

Economic Concerns

Fitch Ratings expects non-performing loans at Thai banks to rise further albeit slightly for the remainder of the year. Second-quarter results indicated a weak operating environment due to deteriorating profitability and asset quality. The results underscore our negative outlook on the sector. Still, we believe Thai banks' capital buffers and reserve coverage should remain adequate to withstand a cyclical downtrend, said the ratings agency in a recent note.

The World Bank is forecasting 2.5 percent growth in the Thai economy this year, down from 2.8 percent last year; some estimates optimistically see a 3 percent GDP growth. Thailand's benchmark interest rate is 1.5 percent, which is not expected to change until late next year as the Bank of Thailand monitors Federal Reserve action.

Fitch has kept the ratings outlook of most Thai banks at Stable, despite a negative sector outlook. Credit profiles have remained broadly resilient given deteriorating asset quality due to strong capital and reserve buffers. The sector's stand-alone CET1 capital ratios averaged 14.2 percent in May 2016, up slightly from 14 percent at end-2015, and were well in excess of regulatory requirements (which, including the conservation buffer, is 5.125 percent this year and will rise to 7 percent by 2019). Banks' loan loss coverage also remained solid in excess of 100 percent for large listed banks and above 80 percent for smaller lenders as of first half of 2016, according to Fitch.

THD, which holds 125 stocks, has a three-year standard deviation of 18.1 percent, making it more volatile than the MSCI Emerging Markets Index.

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Disclosure: Todd Shriber owns shares of VWO.