Morgan Stanley is positive on the Thai market, despite recently downgrading the country from its most preferred ASEAN 3 market in favour of Indonesia.

“[We] believe that the recent correction is overdone and presents a good entry opportunity. Our current target for the MSCI Thailand (US dollar) index implies 12 per cent upside through 2013,” the bank said in its latest ASEAN Equity Strategy market report.

Morgan Stanley said the 7 per cent pullback by the MSCI Thailand local currency index has been driven largely by “panic selling resulting from unwinding of speculative retail trade as retail brokers have begun demanding higher cash collateral”, and “margin from retail investors to rein in the recent rise in speculative activity”, according to the report.

Investors are also increasingly concerned about the potential imposition of capital controls by the Bank of Thailand to rein in capital flows, the US firm said. Morgan Stanley said the central bank will continue to liberalise capital outflows if pressures on liquidity inflows/currency appreciation persist rather than imposing capital controls as it did in 2006.

“The narrowing of Thailand’s Balance of Payments surplus from an average 6.9 per cent of GDP in 2007-11 to 1.4 per cent in 2012 is likely to dissuade BoT from imposing capital controls, and despite the recent rise in political noise, we see a high probability that Thailand will be able to achieve political reconciliation in 2013,” it said.

Thailand’s fundamentals remain intact, according to the bank. Visibility of investment-led growth has increased with the recent cabinet approval of Baht 2 trillion in infrastructure spending over seven years.

“Consensus expects MSCI Thailand companies to report 19.7 per cent earnings growth in 2013, amongst the best in the region,” it said.

“Considering strong growth visibility for 2013 and high return on earnings, we find valuations reasonable. Based on our recent bottom-up analyst recommendations, we are replacing Bangkok Bank with Bank of Ayudhya, and MINT [hotel and restaurant operator, Minor International] with CP All [formerly known as CP Seven Eleven]in our Thai Focus List,” the report concluded.