A Contrarian Closed-End Strategy for Investing in Thailand’s Emerging Market
by Karim Rahemtulla, Emerging Markets Expert
Tuesday, April 27, 2010: Issue #1247
If you’re looking to increase your knowledge of emerging markets, start with this one crucial common denominator…
It’s a trading pattern shared by the likes of Indonesia, Malaysia and Thailand. To some extent, it’s also found in the bigger emerging market nations like Brazil, Russia, India and China (the “BRICs”).
When times are good, emerging markets soar in value. But when there’s a crisis, they plunge faster than developed markets.
That’s the macro-economic view. But what if you want more specific clues as to what to buy – and when?
A Great Way to Invest in Emerging Markets – And the Best Time to Buy
The key lies in the price fluctuation of emerging market closed-end funds.
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Definition: Closed-End Funds Closed-end funds are made of investments (usually stocks and some bonds) and trade like stocks in real time on the market’s major exchanges. They’re the opposite of open-ended mutual funds, which are priced after the close of the market each day and don’t trade during market hours. Because they trade in real time like stocks, closed-end funds are subject to the vagaries of supply and demand for shares. So the prices of closed-end funds rarely reflect the true value of the holdings they have. That’s why it’s important to buy them at the right time. In this respect, look at the Net Asset Value. Definition: Net Asset Value (NAV) This tells you whether a fund is trading at a discount or premium to the holdings it owns. You get this value by dividing the value of the fund’s holdings by the number of outstanding shares. You can get information about closed-end funds, their holdings and NAV at the Closed-End Fund Association (CEFA). With regard to the NAV, look for the spot that tells you whether the fund is selling for a premium or a discount. My rule of thumb is this: If the share price is trading at a premium of 30% or more to the NAV, you should stay away or even liquidate your holdings. If it’s trading at a discount of 30% or more, you should buy. |
And when it comes to the current situation in Thailand, closed-end funds give you a good way to invest if you’re willing to go contrarian. Especially at this particular time.
Here’s how…
On the face of it, few people would want to invest in Thailand at the moment, given the political unrest. Bloody clashes in Bangkok between government protestors (who want the government to relinquish power and call new elections) and soldiers have already killed 24 people and injured hundreds of others.
It’s the worst political unrest in Thailand in 20 years and the protests have affected its economy…
- The SET stock exchange is at the lowest point in five weeks…
- Fitch has cut Thailand’s credit rating from Stable to Negative…
- The tourism industry has suffered the biggest blow. The New York Times reports that foreign visitor numbers are down 70%. This is unusual, given that this is normally a busy season for tourism. However, hotel occupancy rates in Bangkok are down 20% at a time when hotels are typically 80% to 90% full.
Thailand’s tourism industry accounts for about 20% of its annual GDP. So it’s easy to see why many tourism companies and businesses like hotels, restaurants and retailers want a quick resolution, given the damage being done to their trade.
So where does this leave us investment-wise?
When Panic Reigns, Pull the Trigger
When a true emerging-market crisis is occurring, you can often pick up closed-end shares at discounts approaching 30% to 40%.
Imagine that – buying a dollar for $0.60.
Of course, these are the times that most investors are scrambling to sell their shares en masse – hence, triggering cheap opportunities. While they’re sleeping and panic is occurring in the streets of a city like Bangkok, their first instinct upon hearing the news the next morning is to sell… sell… sell.
With closed-end funds, this usually means a lot of shares hitting the market in a very short time. Since these funds aren’t the most liquid instruments, any mass selling drives down the prices fast – and at a discount to the NAV.
That’s when you need to pull the trigger on the other side and buy. (Conversely, the time to sell is when they trade at a premium to NAV.)
For example, during the financial crisis last year, I bought a couple of closed-end funds to reap the ensuing rewards. The fund I invested in most heavily was the Templeton Russia and East European Fund (NYSE: TRF). I also bought one of its components, cellular provider VimpelCom (NYSE: VIP). Both trades worked out quite well.
Did I buy based on fundamentals? Nope. No time for that. This was a trade based on panic, not for a long-term hold. And I used the same formula that I’m sharing with you today – one that has worked every time I’ve used it and is very simple.
The Best Way to Go Contrarian on Thailand
Right now the Thai Capital Fund (AMEX: TF) is trading at an 18% discount to its NAV. So it has a way to go before it hits my “buy when the NAV is 30% or higher” rule that I mentioned earlier.
Set up 20 years ago, the fund invests in both large-cap and small-cap Thai stocks and is broadly diversified across several sectors. It’s domiciled in New Jersey and uses the Stock Exchange of Thailand as a benchmark for the performance of its portfolio.
We haven’t yet seen full-blown panic in Thailand, but the situation (and the Thai Capital Fund’s NAV) is well worth monitoring if you’re looking for a contrarian investment in a solid emerging market.
Good investing,
Karim Rahemtulla
Related Investment U Articles:
- Closed-End Funds vs. ETFs: Are You Missing Out On “Secret” Profits From Emerging Markets?
- ETF’s are Great, but Don’t Overlook Closed-End Funds
- How the Current Political Unrest Could Trigger an Eastern Opportunity
- The PIIGS Nations: Five International Investments for Any Global Stock Watchlist
- Investing in South Korea: Why This Emerging Market is a Perfect Contrarian Opportunity
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Dubbed a "market maven" by CNBC, Karim Rahemtulla is one of the country's foremost specialists in options trading. As founder and editor of The Smart Cap Alert, he focuses his efforts on all aspects of options trading – LEAPS, put selling/covered calls and spreads. 
