Knight Asia Newsletter August 2018

Asian Markets put in mixed performances in July with the Hang Seng Index -1.3% (YTD -4.5%), the MSCI Asia ex Japan Index +0.3% (YTD -5.5%), the MSCI AC ASEAN Index +4.0% (YTD -7.5%), and Thai SET Index putting in a strong performance up +6.2% (YTD -4.7%). The Knight Mekong Fund was up +0.2% (YTD -3.4%) & the Knight Asia Contrarian Fund up +0.6% (YTD -2.6%).

 

Across Asia most markets recovered slightly in July as overseas institutional selling abated. ASEAN markets fared best with domestic bargain-hunting lifting indices off the lows. Defensive stocks gained the traction including banking and energy stocks in both Thailand and Singapore. China shares generally hit YTD lows as US trade friction worsened, which was exacerbated by weakness in the US technology shares, triggering selling in Tencent. We covered our short position on Tencent and took profit on some of our China construction shares.

 

As we continue the summer holiday period in Europe and the US, western markets are likely to trade quietly lower; whilst Asia markets will be domestically driven. This may favour Thailand and Malaysia, where foreign influence is less significant. Most market participants will spend their vacations pondering the impact of Brexit and US trade policies, and perhaps wondering whether they should finally exit their high priced FAANGs and BATs. As the liquidity bubble gradually deflates over the coming 12 months, it seems clear that the tech bubble is the most likely to suffer.

 

After just visiting the UK, it is clear that polarization between Brexiteers and Remainers continues, and Teresa May’s compromise has satisfied neither side. In that sense, there are now three scenarios: 1) No deal with the EU, and UK crashes out under WTO terms early next year; 2) There is a deal with the EU, but Parliament fails to pass it, then the PM calls a second referendum (which might include the option to Remain, ratify the Deal, or Crash Out); and 3) Parliament passes the deal, which is a soft Brexit, and riots break out across Britain, possibly resulting in an early general election and a Labour/Liberal coalition government. None of this will have much direct impact on Asia.

 

On the trade front, it seems unlikely, that a compromise will be struck between the US and China, before the US mid-term elections. However, there is a limit to how much China can retaliate, since the US exports to China (at US$ 130 billion) are so much less than Chinese exports (US$ 500 billion) to the US. China’s managed slippage in the RMB has softening the impact of US tariffs on Chinese exporters whilst also triggering similar falls in the Thai Baht and Singapore Dollar. Most likely, the US /China trade “War” will be protracted due to its key place within the current US administrations foreign and economic policies, and this should be good news for ASEAN FDI as companies diversify their production sources away from China.

 

In early August, the acceleration of depreciation in the Turkish Lira has investors again questioning exposures to emerging markets. Whatever the reason for the geopolitical friction between Washington and Ankara, it will be a huge loss for NATO, if Turkey ends up aligned with Russia & China. From an investment stand-point Turkish stocks may soon present an interesting buying opportunity, although it is probably too early. However, we are confident that there will be no major contagion with other so called “emerging markets”. Asian markets generally have abundant domestic liquidity and government reserves and can absorb any wave of foreign selling if it comes.

 

With best regards

JEREMY