Thailand is likely headed for a K-Shaped recovery; here is what that means

Have you wondered why the stock markets of certain countries are performing better than others since the lows recorded in the third or fourth week of March despite almost every country’s economy nosediving? 

Take this, for example, the COVID-19 infections in the United States are widespread and are still rising at an alarming rate, yet its major stock indices, NASDAQ and S&P 500 Index, have returned to 24 per cent and 6 per cent respectively this year. And the Stock Exchange of Thailand Index is down 19 per cent in US dollar terms this year despite an incredibly low COVID-19 infection rate in Thailand. 

For a comparative purpose, we use all returns in US dollar terms. 

And even more, from the low of the year seen in March, NASDAQ and S&P 500 indices have risen 63 per cent and 48 per cent respectively. This whopping performance, though not uncommon for a stock, is rare for any global index. Does this make you wonder if America is affected by COVID-19 at all? 

The United States of America is not the only “wonderland” equity market this year. South Korea, China, Taiwan, Canada and Brazil have also recovered strongly from the lows recorded in March. In fact, with a rise of 113 per cent from the year low on March 19, South Korea is the world’s best performing market this year with YTD rise of 33 per cent, followed by NASDAQ, China, and Taiwan. 

Another interesting observation is that Thailand, Hong Kong and Singapore, with one of the lowest COVID-19 infection rates in the world, are in the worst performers’ list. 

Surprised by these stats, Equistock looked for reasons behind such unexpected returns. However, before going into the reasons, let us take note of the following observations:

  1. Emerging markets have shown the best recovery from the March lows
  2. Within Asia, a few rich countries, heavily reliant on exports, have recovered strongly
  3. Economies with struggling local consumption are the worst performers in Asia
  4. A new shape recovery is emerging

To make meaningful comparisons, Equistock clubbed regional markets in different categories as below:

  • Rich GDP/capita exporters – South Korea, Taiwan, China, and Malaysia*
  • Largely reliant on local consumption – Thailand**, Philippines, Indonesia and India
  • Europe – Germany, France, UK, Eurozone and Switzerland
  • Americas and Japan – USA, Canada, Brazil and Japan

We excluded Hong Kong and Singapore in this grouping as most of the stocks listed in these markets have businesses in China, Malaysia, Indonesia etc. * Malaysia is not a big exporter, it falls in the same category as Korea and Taiwan for electronics exports. ** Thailand is highly dependent on local consumption and tourism income. 

Now, let us look at the performance of these clusters in US dollar terms. 

Within Asia, the cluster of Korea, Taiwan, China and Malaysia performed much better than Thailand, Philippines, Indonesia and India despite the varying degrees of COVID-19 infection rates, lockdown, etc. 

And the differential in returns is a whopping 30 per cent. This cluster not only performed better than other markets but it is also up 15 per cent year-to-date (YTD).

When compared with other clusters, such as the Americas, the rich exporters’ Asian cluster still performed better than any other regional markets. Though the outperformance between Americas and rich exporters narrowed to 20 per cent, it is still very significant. Note that in the Americas cluster, we have included Japan, which to some extent has pulled down the performance due to Japan’s heavy reliance on the old economy. 

Next, we compared the Americas with the Europe cluster. The result is startling. Both clusters are moving hand in hand. 

It is remarkable to note that though both regions, the Americas and Europe reported widespread infections and resorted to lockdowns, yet their major equity indices not only shrugged off the negative impact of the sharp reduction in economic growth but also performed in sync, almost rising to the pre-COVID levels. 

What is driving performance of certain countries? 

Clearly, the extent of COVID-19 infections and the overall impact on the economy does not seem to be a critical factor in the overall scheme of things. 

One could argue, the difference could be the magnitude of stimulus and aid granted by various governments. 

Well, without attempting to be an economist and comparing every governments’ stimulus packages by the percentage of the size of the economy, because all the governments have injected liquidity, and money between 10-15 per cent of the country’s GDP, our analysis concluded an emergence of a new shape of the economic recovery: the “K-shape”. 

What is a K-shape recovery?

Since the COVID-19 outbreak, economists, media, and social media chat boxes have been talking about the potential shape of the economic recovery, when and if it happens, in the post-COVID-19 era.

The shape of recovery, mostly matching English alphabets, being discussed by experts until a month ago were

  • V-shape – a gradual fall to the bottom followed by a quick recovery. Thailand experienced a V-shape recovery after the big floods in mid-2011 and a prolonged recovery post the 1997 currency crisis. 
  • W-shape – quick bottom followed by quick recovery but another sharp fall subsequent by a recovery over a much longer period. 
  • L-shape – as the name suggests a rapid fall to a bottom and remain at the bottom for a long time. Luckily, no economy stays that way, for long. 
  • Nike-woosh-shape – a quick fall to the bottom, and a gradual but steady recovery over a long period.
  • K-shape – a rapid fall but a half recovery, and two-pronged recovery with one prong falling, and other prong rising. This is where some of the countries are now.

A K-shape recovery means a section of the economy is doing exceedingly well, while the other segments are sinking. Pace recovery and shape of the “K” depends on how many segments or companies fall in the rising prong or falling prong.

The chart below of Thailand’s GDP growth demonstrates the different types of recoveries:

K-shape recovery is very visible in Korea, China, US, and Taiwan markets, and is being driven by the technology companies. Needless to say, stocks for companies such as Apple, Netflix, Amazon, Tesla, Facebook, Google, Microsoft, Alibaba, SAP, Sony, and so on are skyrocketing, while real or old economy stocks, such as GM, Toyota, most banks, most cement companies, etc. are at the bottom of the pile.

But the rising prong of K is not all about technology. Major movers include biotech companies, possible vaccine makers, gloves makers, etc. All in all, it is the prime beneficiaries of the COVID-19 crisis. 

How does K shape recovery look in Thailand?

Thailand does not have many technology companies, despite being known for electronics parts makers hub in early ’00. The great floods in 2011 which caused supply disruptions of many Japanese electronics parts makers such as Sony, Panasonic, etc., scared them away to relocate to other countries. 

Yet Thailand has managed to make a mini “K-shape” of its own. 

Look at the best and worst performers amongst large market stocks since March 13 when the SET sank to its lowest of the year. 

You may notice, only a select few such as DELTA, JMART, COM7, HANA, and KCE are in these top performers. A few other stocks which have sneaked onto this list are beneficiaries of the COVID-19 pandemic. 

For example, STA, the rubber gloves maker, and PTL, assumed to be beneficiary of increased demand for packaging. Other names such as RBF, ICHI, SUPER, PRM, DOHOME, TKN etc. have company-specific events, which may not be related to the ground realities of Thailand’s economy.

Is K-shape recovery healthy phenomenon? 

Absolutely not. The K-shape reflects the divergent within the economy marked by a post-COVID-19 normal which reflected by greater than before divides in the economic, social, and political cadre. 

At the social level, we are witnessing increasing unemployment, the slow death of the SME sector, and increased psychological problems due to loss of jobs, return to a joint family structure driven by the work-from-home phenomenon, and a big question mark on the current government’s ability to stay in power. 

At the political levels, the K-shape recovery will make the country leaders promote nationalism, causing a further divide between the rich and poor nations, and a larger divide between “haves” and “have-nots”. 

Vaccine, when found, will help developed countries 

Experience with vaccination programs for swine flu shows that rich countries received preference for vaccination while poor nations continued to struggle.

Developed countries have resources to produce and implement vaccinations at the cost of poor nations.

Take, India for example: even if a vaccine is successful by end of 2021, it may take years before the nation is able to produce billions of doses, not to forget injecting them to its ever-growing population. For instance, the poliovirus vaccine was first made in the United States in 1950. Yet, India was infected by a hyper pandemic of polio by 1990 despite its Expanded Program on Immunization since 1979. Only by 2011, India managed to eradicate polio. 

It may appear, for now, that emerging markets have done better due to the number of technology companies and COVID-19 beneficiaries, but as the time passes and economic recovery in the old style economies begins, it will be the US and Europe outperforming Asia. 

When will that happen? The answer lies in which shape of recovery you bet on. How about an “I-shape”?

How to position for “K-shape”?

For investors in Thai equities, the time to bet on the rising prong of the K is over – at least for the stocks that have already done remarkably well and are looking quite overvalued. 

For example, COM7, a retailer of IT products in Thailand, has mirrored share price performances of Best Buy, perhaps the world’s largest brick and mortar retailer of IT products. Best Buy with a market cap of 865 billion baht vs. COM7’s 47 billion baht is trading at PER of 15x vs. COM7’s PER of 33x. 

Similarly, DELTA is trading on PER of 30x, perhaps its highest in its recent history. Furthermore, would you buy a stock which has risen 288 per cent in the last six months? 

Yet, gains are still possible for STGT.

Investors are wrong in thinking that a vaccine, whenever is made, will reduce demand for gloves. This nasty virus has created a paradigm shift in the health care system by creating irreversible demand for gloves.

The sharp rise in demand will come from underdeveloped and highly populated countries such as India, Mexico, Indonesia etc, which not only have extremely low usage of gloves per capita but have also seen an explosion in infections. 

The use of gloves has shifted the demand curve and a vaccine will not lower it, though investor perception may swing. The profit outlook for STGT will diminish only when new supply appears, which is not possible until 2022.

According to many analysts, STGT is worth over 100 baht per share. 

Aside from STGT, however, Equistock recommends ignoring the rising prong of K. There are gains to be made in the lower arm of “K”. This leads us to simple, old-style picks from the old economy. 

  • AOT – An irreplaceable franchise with strong cashflow. The Thai government is slowly opening borders to lure tourists. When flights resume, investors will quickly price in the best-case scenario, causing a rapid share price rise. 
  • CPALL – This is the only company in the CP Group we recommend. Its sales are affected temporarily due to the absence of tourists. But time and again, it has reinvented itself and will soon do once the announced acquisition of Tesco Lotus is completed. 
  • ADVANC – Best bet on technology and economic recovery. ADVANC share prices reflect a mix of economic downturn and technology. While mobile phones sales and usage should suffer from the loss of tourists and the reduced purchasing power of locals, increase in data usage and desire to spend more time on the phone, in absence of other entertainment, is creating a positive balance for the company. A price-war amongst three mobile operators has subsided. The launch of the 5G network is more of a drain on the business as a commercial application of 5G is far away.
  • BDMS – Suffering from lack of medical tourists, it is perhaps trading at a slight premium to its fair value based on the local patients’ business only. The 270 days visa stay proposed by the Thai government will welcome the start of medical tourism. 
  • HMPRO – When the economy returns to life, home renovations, if not property purchase will see a strong recovery. The company has strong cash flows, franchise, and smart management. 
  • PTG – The petrol and gas distribution company did not suffer from COVID-19 as vehicle traffic in Thailand did not suffer. With the increase in domestic travel, Thais are travelling more by cars and increasing consumption. 


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