JP Morgan upgraded Thailand to "overweight" from "neutral", citing the strong currency and declining interest rates as factors, while the baht hit a nine-and-a-half-year high of 34.65 to the US dollar yesterday.

The stock market also rose, climbing 0.79 per cent to 674.84 points, in thin trade of Bt9.05 billion. Dealers attributed the rise to a combination of blue-chip gains and speculative buying in penny stocks. They expect the market to rise again today.

Foreigners were net buyers, to the tune of Bt240.73 million, for the first time in several weeks.

At 8.03am, the dollar was quoted at a nine-and-a-half-year low of Bt34.67, down from Bt34.78 at the Asian close on Wednesday, amid broad weakness in the US currency. The baht closed at a high of 34.65 to 34.67, compared to the opening rate of 34.71 to 34.73. The greenback also hit a two-year low against the euro yesterday, falling past $1.34 against the European unit.

"We believe Thailand has the strongest macro conditions for re-rating in emerging markets," JP Morgan said in a report released yesterday. "Thailand has the combination of the strongest currency and declining interest rates. We are upgrading Thailand to overweight."

It compared Thailand to Korea in 2004. In October 2004, the Korean won started a sharp appreciation. In August and October the Bank of Korea reduced interest rates. These events helped set the conditions that saw Korea outperform emerging markets by 20 per cent in 2005, and Asia Pacific excluding Japan by 30 per cent.

JP Morgan said the baht had appreciated by 10 per cent this year. A strong currency boosts consumers' purchasing power, while discouraging the export of savings and attracting international capital.

JP Morgan forecast the Bank of Thailand would cut rates by 100 basis points to 3.75 per cent this year, a process which has started already.

"We believe that investors are underestimating the combined impact of a strong currency and pro-growth monetary policy on Thai GDP and profit growth into 2008. Now is the time to position for this inflection point," JP Morgan said.

JP Morgan said it had overweighted banks, building materials/contractors, and property but stayed underweight on telecom firms and energy. It said Thailand's earnings-per-share growth for this year is 4.3 per cent, the lowest of all emerging markets it covers. The price-to-earnings ratio is also as low as 0.8 times relative to the emerging markets.

The investment bank said several negative factors in Thailand, such as low economic policy credibility and shaken political stability, are already known.

JP Morgan also views the "unconventional" policy of the BOT on foreign exchange as positive as its result is likely to be lower interest rates.

Deputy Finance Minister Sommai Phasee said yesterday that the BOT had done what it could to slow the appreciation of the baht since early last year, so exporters should not complain about the currency's rise to nine-and-a-half-year highs. The central bank has spent about Bt1 trillion since the beginning of last year to buy foreign currency, he said.

Suchada Kirakul, the BOT's assistant governor, said it had issued about Bt1 trillion in bonds since 2003 aimed at absorbing the excess liquidity in the system. It had been motivated by many factors, not only baht intervention. A trade surplus, capital inflows and public-sector spending caused the excess liquidity.

For example, the government withdrew about Bt100 billion from the central bank last month alone, causing the BOT to issue bonds to absorb liquidity. Of the total Bt100 billion, Bt56 billion was for local governments, Bt25.7 billion for the Health Insurance Fund and Bt10 billion for Revenue Department tax refunds.

Pongpen Ruengvirayudh, the central bank's senior director, insisted the appreciating baht remained in line with other regional currencies. The strength of the baht has been self-fulfilling, mainly caused by a trade surplus and thin capital inflows. Net buying by foreign investors in the Thai bourse has been about Bt27 billion since the beginning of the year, which was close to the selling volumes one day after the BOT introduced its controversial withholding requirement.

Meanwhile, the BOT said that international reserves were not high enough to establish any special entity - such as the GIC, the Singapore government's investment arm - to manage them. The Chinese and Korean governments set up similar entities because their reserves were massive, it said.

Anoma Srisukkasem

The Nation