How will the SET perform due to protest; comparing to previous mass protests

After a break of nearly 6-years, the political temperature in Thailand is off the charts, again.  Anti-government protests have restarted, disrupting the daily life of people in the business districts of Bangkok, and hurting the stock market sentiment.

Street protests are not a new phenomenon in Thailand. The intensity of the current momentum of protests may appear to be weak, as there are no visible leaders or politicians shouting and screaming from the stages built to block intersections. But the movement is broad-based and led by the university students challenging a defiant general, PM Prayuth Chan-o-cha, who installed himself as an invincible premier of the country for the past 6 years initially as a leader of the coup which removed a democratically elected government, and then securing his premiership on technicalities and loopholes in the constitutions written by his team.

The protesters are targeting a former soldier who creates gag regulations overnight and are demanding the reversal of laws that affect the royal family. Their determination may be strong yet, challenging offices with extraordinary powers will be a long protracted affair.

In the past, anti-government protests were led by politicians and/or disgruntled rich businessmen, who demanded to gain political powers. This time the movement appears to be leaderless, and not sponsored by any politicians, at least in the public eye.

Investors are concerned that protests could go on for a long time because of the demands of reforming of royal budget and other reforms. Some of these demands are unlikely to be taken on by the political parties.

Amid all these protests the SET Index has fallen last 2 weeks and may even fall more. Yet, the fall is not due to fears of street protests hurting the Thailand economy. Thailand economy is already hard hit by the Covid19 pandemic.

The stock market is driven more by expectations of economic growth than political uncertainty. On the contrary, resignation by PM, if at all happens, may improve the sentiments.

The SET Index is still trading at an expensive price to earnings ration and price to book ratio. While the domestic consumption has somewhat recovered, the tourism-related industry, which accounts for nearly 20-30% of Thailand’s gross domestic product (GDP), may not return to even 50% of the previous level until end of the year if not next year.

The correlation between the political climate and economy is strong when the economy is in a high growth stage or when government policies boost the economy.  Unfortunately, this is not the case for Thailand for now. Thailand’s economy has been slowing for many years, the coup in May 2014, deepened the slide in GDP growth.

Since the arrival of Gen Prayuth as the leader of the country, in May 2014, Thailand’s 5-year (20 quarters) average GDP growth has fallen from 4 per cent to 2.4 per cent.

How long is the short term?

Although the investors focus on the long-term growth of the underlying economy, the uncertainty in the short term adds to the volatility. Before discussing market expectations for the short-term, let us look at the history and root cause of the current political unrest.

Absolute monarchy to Constitutional monarchy

Thailand is a young democracy for it has witnessed 13 successful coups starting with the Siamese coup d’état in 1932 when Khana Ratsadon, the first political party comprising of civilians and military overthrew absolute monarchy with the monarch at that time being King Prajadhipok.. Thailand’s first constitution was written in December 1932 making the King a constitutional monarch. Within 6 months, however, the military overthrew the constitutional government.

Since then, democracy has been restored multiple times, only to be overthrown by the military again and again.

Student Power Succeeds

Thai students got involved in the power struggle first time in 1973 and again in 1976

In the month of October that year, large student protests successfully ended a 10-year dictatorial rule of Thanon Kittikachorn, forcing him to flee the country and release 13 student prisoners. These people who fled the country in 1973 were able to come back in 1976 and that lead to another protest by students and few unconfirmed sources put the number of demonstrators at that time at more than 500,000 students. The military crackdowned and killed dozen.

The present ongoing movement takes plenty of cues from the success of 1973 & 1976 with hopes of success with no casualties.

Present Power Struggle

The current public and government conflict started more than 15 years ago when disagreements began over the power-sharing between the loyalists and the Democrat party on one side, and the then government sponsored by the rich businessman, Thaksin Shinawatra.

Yellow Shirts movement year 2005-06

In 2005, Sondhi Limthongkul, a media businessman, started a public movement against the then Prime Minister, Thaksin Shinawatra, by forming an anti-Thaksin group named People’s Alliance for Democracy or PAD. The PAD members, wearing yellow shirts, staged protests in the city center, to seek the removal of Thaksin on grounds of misuse of power, bending laws for personal gains, extrajudicial killings, and undemocratically privatizing state enterprises.

The demonstrators disrupted life and businesses in Bangkok for more than a year, and which lead to a political crisis that ended in the September 2006 Coup d’état. Following the removal of Thaksin, who was abroad at the time of the coup, the military government wrote a new constitution and called a general election in 2007.

SET Index outperformed MSCI Asia ex-Japan Index from the period Thaksin became Thailand’s prime minister. The SET did not significantly rise or fall during the 2006 coup, except during the end of 2006 when poorly implemented policies by the military government caused mini-panic.

Yellow Shirts again

In May 2008, within 4 months of the general election, the PAD returned to the Bangkok streets, at the same stage and with the same objective i.e. removal of a democratically elected government. The PAD claimed that the government’s plan to change the constitution written by the military government was undemocratic.

Do you see the similarities with ongoing protests?

The intensity of protests was severe this time. The PAD seized the parliament house, occupied Suvarnabhumi airport in Bangkok, and forced the shut down of Bangkok’s Don Muang airport. The crisis ended with the banning of the ruling party MPs by the court followed by the installation of a new government formed by the opposition parties in December 2008.

During this period of protests, SET did not significantly underperform the regional markets.

Change of Shirts 2010-11

Come March 2010 and a different set of protesters returned to the stage set up at the outside of the Central World mall in Bangkok.  This time protesters comprised of supporters of the deposed Thaksin government, under the banner of The United Front of Democracy against Dictatorship or UDD.  The UDD seized roads around the Central World mall and Lumpini Park for more than 2 months, forcing the then PM Abhisit Vejjajiva to use force to break the deadlock.

The use of force resulted in the deaths of more than 80 civilians. The Central World mall was also torched during the fiasco on May 19th 2010.  Following the public outcry over police killings, then PM Abhisit announced a general election which was held in July 2011.

In a landslide victory, the elections gave power back to the Thaksin affiliated party, this time led by his sister, Yingluck Shinawatra.  

Two-year Cycle – Back on Streets Year 2013-14

Within 2 years of Yingluck becoming premier, Suthep Thaugsuban, formed a pressure group under the name the People’s Democratic Reform Committee (PDRC) and started demonstrations at popular roads and intersections around Bangkok: once again at the Central Word mall, and Asoke intersection.

The PDRC demanded the removal of the Thaksin-affiliated government for attempting to grant political amnesty, aimed to pave way for Thaksin’s return to Thailand from exile, and in place they sought to create an unelected people’s council to oversee political reforms.

Critics say that such political reforms, i.e. the rewriting of a new constitution, was aimed at ensuring that Thaksin-related parties never win elections in the future.

The crisis ended with the dissolution of the house followed by snap elections. Key political party – Democrat party, once again (1st boycott was in 2006 elections called by Thaksin) boycotted the election, and the court nullified the February 2014 election. Another court ruling removed Yingluck and her cabinet ministers on May 7th.

Seeing an opportunity caused by the political vacuum, the Royal Thai Army led by Gen Prayuth ushered in a military coup on May 22nd.

SET Index fell sharply during Jul-Dec 2013, only to move in line with the regional markets in the following quarters.

It is happening again year 2020

It has been only one year since the present government took democratic power. (With some caveats given the constitution favours the military-aligned parties)

Many opposition political parties, and leaders, banned by the court in the last 2 years, accused the ruling government of judiciary meddling, and undue influence over the Senate.

Anti-government protests began early this year after the banning of the now-defunct the Future Forward Party (FFP). Facing the risk of being put in jail under the emergency law, these politicians have become quiet, only to be replaced by mass protests by the university student, perhaps taking cues from student protests in Hong Kong.

Although it is hard to assume that this movement is not helped by the politicians, such a large show of strength by university students cannot be universally aligned to either the red or yellow shirt movements.

The current movement has upped the ante by seeking to roll back increased budgets and the power of the royals. There are also demands to dissolve the house, seek new elections, amend the constitution, and abolish the appointed senate system.

How Long? And When?

We do not make predictions on politics. Here are three possible outcomes, and investment strategy.

  1. Prolonged protests

Recent history in Thailand and neighboring countries shows that student protests may last long with unpredictable surges of increased frequency and intensity. Yet economic damage from the prolonged demonstrations will remain limited unless the Covid-19 infections dramatically fall raising hopes of a quick return of tourists.

The government can function normally despite traffic interruptions and its deteriorating world image. During the previous occasions of prolonged protests, SET Index did not significantly underperform the regional markets. There is no reason it would do any different now, except in the very short term.

  • PM Resigns

This is very unlikely scenario. Gen Prayuth, who gained power first by force, and then by writing laws to make himself politically invincible, does not think he is at fault. He did not become the premier of the country by promising improvement of the economic or social system. He is extremely unlikely to sacrifice his power even if the economy deteriorates.

A repeat of October 1973. i.e. PM fleeing the country, is also unlikely. However, if that does happen, SET Index would rise. Upside may remain limited however, because

  1. any solution will be temporary
  2. economy is still marred by ineffective long-term policies
  3. impact of Covid-19 epidemic is far from over.
  • Student Momentum Fades

Equipped with the power to write draconian laws overnight under the state emergency rule, Gen Prayuth may use force to remove protestors. Though such an act will simply postpone the problem, investors may cheer a relief rally.

We think that a “temporary solution by use of force” is a highly likely event.

Investment strategy

Stay focused on businesses with a long term outlook. In our previous strategy note, we selected the following stocks. Our view is unchanged.


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