SINCE last year, the Thai economy has been a source of many surprises - few of them pleasant.

Twists and turns such as last September's military coup, the subsequent terrorist bomb blasts and flip-flops in investment policy have led some foreign investors to shun the previously promising market in search of more predictable investment climates.

Yet, while fund managers looked elsewhere, the Thai market has defied expectations, delivering a performance that is anything but dismal.

In recent weeks, both the Thai currency and stock market have risen to their highest levels since the 1997 Asian financial crisis.

The benchmark Stock Exchange of Thailand (SET) index has surged 35 per cent since the start of this year, while the baht has gained around 5 per cent against the greenback, reaching 34 baht per US dollar.

Analysts turn 'overweight'

THE country is back in favour with some, if not all, of the smart money.

Earlier this year, it would have taken a brave analyst to stick his neck out and recommend Thai investments.

Last week, research houses including HSBC and ABN Amro turned enthusiastic over the country's prospects, recommending that investors go 'overweight' in Thai stocks, a sharp turnaround from their 'underweight' calls earlier.

Foreign money is also returning to Thailand, albeit at a trickle.

The latest Citigroup study of fund flows showed that US$9.5 million (S$14.4 million) entered the Thai market last month, marking a reversal from the US$190.5 million net outflow of funds in the first half of this year.

But economists argue that, in terms of economic fundamentals, there is little new data to suggest an upturn.

Strong exports, especially of agricultural produce, have been supporting growth so far this year. However, consumer spending is still in the doldrums, and private investment, feeble.

In fact, the Bank of Thailand just downgraded its official gross domestic product (GDP) forecast for this year to between 3.8 per cent and 4.8 per cent, from 4 per cent to 5 per cent.

Cheapest in Asia

SO WHY are stock pickers abuzz over Thailand again? What has changed?

The magic word is 'value'.

In other words, it is not so much that Thailand's fundamentals have turned immensely rosy overnight. Rather, what has happened is that its neighbours' red-hot asset markets have become expensive by comparison, and funds are likely to go elsewhere in search of assets that still have the potential to rise.

'Our call is based on the argument that Thailand is the cheapest market in Asia, and that investors will rotate into markets that are still reasonably valued,' said HSBC global research strategists.

While the SET index has been climbing, flush liquidity has catapulted other regional bourses such as those in Singapore and the Philippines up by even more.

Analysts reckon Thai stocks have a forward price-to-earnings ratio of 11 to 12.

Compared with Asian equities outside Japan, Thailand is a bargain. To be exact, it is 22 per cent cheaper, noted the HSBC strategists.

Political and economic outlook

HOWEVER, economists caution that there is still no clear sign of a strong rebound.

Just as politics have dictated the country's economic developments in the past year, much of its economic recovery hinges on what will happen on the political front.

The end of the military-appointed leadership and the election of a civilian government at the polls planned for year-end will help restore consumer confidence, which is still languishing, said United Overseas Bank economist Alvin Liew.

'Before the Thai people can start spending in a big way, there must be some return of confidence in the political situation,' he said.

However, the drastic controls imposed on investment flows and the subsequent flip-flops have kept some investors apprehensive. They are 'adopting a wait-and-watch approach, given the political uncertainty and especially after the bitter taste left by investor-unfriendly policies late last year and earlier this year', wrote DBS economist Aathira Prasad.

Hopefully, a growth stimulus will come from a government spending surge in the run-up to the planned elections, offsetting weak private spending.

One encouraging sign is that the Thai business sentiment index, which had been trending down, shot up sharply last month.

Also, businesses are starting to stock up on equipment again, noted ABN Amro analysts Tham Mun Hon and Andrew Tan.

The recovery in imports of capital goods suggests that 'barring any further political complications, the worst seems to be behind us', they wrote in a report.

There are also tentative signs that consumer demand growth, while still negative, is bottoming out, said ABN Amro.

With the verdict not quite clear for now, some investment experts are taking a wait-and-see approach.

Although Thai equities are relatively cheap, whether they will continue to surge is still an unknown, said a Singapore-based veteran fund manager.

'Yes, it is a laggard to begin with. Every time in the run-up to elections, the Thai market has always done very well. But I think we can afford to wait a while,' he said.

'This market is susceptible to political news. If you are a fund manager, there are more compelling stories elsewhere, in terms of value. Why should I take the risk?,' he asked.

'If, for some reason, they postpone the elections, do you think the market is going to continue to do well? I'm not sure.'

ericatay@sph.com.sg