OUR immediate reaction to the insanity wreaked in currency and equity markets by the Mexican crisis was that concerns over the baht were overly pessimistic or totally misplaced.
At the same time, we cautioned that a lingering reduced appetite for exotic currencies could force Thailand to raise interest rates by more than US rises would imply in order to continue attracting the short-term inflows it needs to finance the nation's current account deficit.
That risk remains. However, the questions now are: how long will the situation last and how severe will it be? At best, the strain could be absorbed by the money market and be alleviated within a couple of weeks. At worst, an incremental risk premium may need to be applied to rates across the board for over six months.
On the positive side we lift our hats to the Bank of Thailand for handling the crisis with commendable skill. The central bank's performance here is an obvious confidence booster for the baht and mitigates against the currency being singled out for a trouncing in the near future.
The economy is in superb condition.
We estimate respectable corporate earnings growth of 24 per cent for 1995 and 20 per cent in 1996. This places the market on 15.7 times 1995 earnings and 13 times 1996 earnings.
On investment strategy, we continue to advocate a neutral weighting in Thailand until the consensus is that there is only one more US rate rise to discount and the effects of the Mexican crisis on baht rates are clearer.