Thailand’s military coup – the 12th successful one in the last 80 years – ratchets up tensions and worries that one of the larger economies in the region is may enter a "lost decade".

When the military announced martial law on May 20, investors were already nervous. The May 22 coup, led by army chief General Prayuth Chan-ocha, who is now the acting prime minister, pretty much confirms that the country's political problems aren't going to be solved quickly.

“We believe the coup will have even more serious negative repercussions on the market and economy,” says CIMB’s analyst Kasem Prunratanamala. “Even as some investors had initially thought martial law was the right step forward in bringing about political stability, we beg to differ and remain concerned about the road ahead for Thailand.”

The military forcibly took over after talks between political opponents – dubbed the red shirts and yellow shirts -- broke down. More than 150 politicians and government officials, including recently ousted Prime Minister Yingluck Shinawatra, were ordered not to leave the country without permission. A few supporters on both sides have also been arrested. Curfew has been declared from 10pm to 5am.

On May 23, Thailand’s SET dropped as much as 2.1% from 1,405.21 points, before recovering most of it to close at 1,396 points by end of trading. Since May last year, the index has lost more than 13%.

So how should investors react to this turn of events? Previous coups have affected the stock market differently. In the February 1991 coup, the market, caught by surprise, crashed 7% on Feb 25 1991. “Thai people at that time had thought that a military coup was a thing of the past,” recalls Kasem. In contrast, the most recent coup of September 2006 which saw the removal of Thaksin Shinawatra, Yingluck’s elder brother, was “welcomed” by the people, he adds.

Kasem believes that the trading activity this time round would be more subdued than before. “We believe that following the plunge, the market would likely be quiet,” says Kasem.

However, investors can consider bottom-fishing if the market drops sharply. These include blue chip Thai companies like Airports of Thailand Public Company Ltd (AOT), second largest mobile operator Total Access Communication Public Company Limited, commonly known as DTAC, and Mega Lifesciences.

The few Singapore stocks with exposure to Thailand also did not react too badly. Banyan Tree, with its big chunk of properties in the country, closed unchanged at 64 cents on May 23; Tiger Airways, which plies regularly between Singapore and Bangkok, similarly held steady at 41.5 cents. Thai Beverage, which sells a wide range of alcoholic beverages across various market segments, was up 1 cent to 60.5 cents.

Kasem says it will take quite some time back things get back to normal. Therefore, the country’s economy will suffer “serious repercussions” as private investors hold back their business activities and investments. Public spending is also likely to be held back, as the military government’s priority is political reform. “Even though the new government still wants to implement infrastructure spending, we believe that it will have smaller multiplier effects as the private sector may not want to take risks of political uncertainties and want to wait for an elected government,” says Kasem.

Thus, the earning forecast of SET-listed companies, already trimmed for this year, is likely to be cut again for next year. CIMB’s previous expectation, made late last year, was for EPS growth of 18% for 2014. The estimate has been slashed to just 10%. A similarly quantum of cuts for 2015 would imply earnings growth of 5% instead of 13% previously. “Meanwhile, we believe that with political uncertainties likely to be prolonged, rather than curtailed, earnings growth this year could be cut further,” says Kasem.

Even before this latest development, CIMB’s target for the index this year has been cut from 1,500 points to 1,200 points, which is based on 10.7 times FY2015 forward PE, and 0.5 times below the five-year historical average.

The slowing economy, where Q1 GDP dropped 2.1%, will continue to hurt consumption. Earlier hope of a second half rebound has faded. “The market is likely to remain in the doldrums for the longer term,” says Kasem.