Knight Asia Newsletter April 2020

Asian Markets bounced back in April as sellers reached cash targets, but remained well down on the year. The Hang Seng Index is -13.0% YTD, MSCI Asia ex Japan Index -12.5% YTD, MSCI AC ASEAN Index -26.6% YTD, the Thai SET Index -24.9% YTD, & FTSE Vietnam -19.9% YTD

 

April saw the beginnings of a more balanced debate on the merits of lockdowns and economic damage to people’s livelihoods vs the likelihood of people actually catching COVID in a serious way. Data increasingly shows that 90% of those infected with COVID show no symptoms, and that 90% of the 5% with serious symptoms are those of advanced years or having existing serious illnesses. It was apparent from as early as February who the risk groups were. So why did almost all governments, except Sweden, choose the path of optimum economic destruction, making this essentially a political rather than health crisis ? The answer varies from country to country. No doubt the motivation was to protect people against a perceived health threat, but the effect has been a bureaucratic power grab.

 

In South-East Asia, the main motivation appears to be political, since the virus never really took hold, presumably due to the hot & humid climate, despite months of unfettered access for Chinese tourists. In Thailand infection rates are 0.0005% or 1 in 20,000, and death rates 1/400 of those from the antibiotic resistant superbug, and cases less than 3% of dengue fever cases. Similarly in Philippines, Malaysia, Indonesia and Singapore. Singapore is touted as having 14,000 “cases”, but with 10X the testing of Thailand, Singapore identifies many asymptomatic cases, and has had just 14 (unfortunate) deaths (or 0.1% fatality)

 

To put it kindly, governments in ASEAN were keen to show that they care about the health of their subjects, or were responding to the virus of fear generated by the media. Unfortunately poor people in these countries live hand to mouth, and cannot do labouring jobs from home. Protest movements in Hong Kong and Thailand were conveniently curtailed under group gathering restrictions. Asia has a way of “pressing the reset button every 10 years”, you can decide for yourselves whether this is a natural cycle or engineered by the “powers that be”. Certainly the COVID collapse has created opportunities for those with available liquidity.

 

In April, the media and investors started to get bored with the COVID hype, and this coincided with apparent cresting of new COVID infections in many countries, media airing of more clinical success of the various treatment protocols, and publicity surrounding over 80+ vaccines are under development The vaccine race is being led by Moderna in the US, Cansino/PLA in China, and Jenner Institute/Oxford Vaccine Centre in cooperation with AstraZeneca. All of whom have been running clinical trials for 1-2 months and expect launch by September.

 

The global markets reached an equilibrium in the middle of March and have since recovered between 30-50% of their losses. Asia is likely to see a V-Tick shaped recovery in the markets, but a W shaped economy. The US should be similar, but Europe more likely a V/Tick on the markets and U on the economy. Despite disastrous corporate earnings in the 2nd & 3rd quarters, it is hard to see how markets can go down much, faced by enormous amounts of money printing in the West, and near zero interest rates.

 

China’s PMI maintained itself above 50 in April, after falling inevitably to a low of 38 after February’s two week Chinese New Year / COVID break. The Chinese National Congress will convene on 22nd May in another sign of return to normality. Supply chains have held up fine, the worry now is of a steep decline in European & US demand just as China gears up its production capacity. Initial 1st Quarter GDP numbers in Europe were not that bad, showing just -3.8% contraction, but given only 2 weeks of lockdown in March, 2nd Q will be worse. Overall, a surprising segment of the economy seems to continue even with most people locked in their homes, and government handouts have supported basic consumption. In South-East Asia, regional tourism will certainly bounce back quickly once it becomes possible to fly again, but long-haul intercontinental travel will take longer to recover

 

The biggest identifiable geopolitical impact of the COVID shock, is the further segmentation of the World into three blocks: The Americas, Europe/Africa, and China/Japan dominated Asia. This was happening already, and is now certain. The West will isolate China, and China will increase its stake in South-East Asia, in direct competition with Japan, although RCEP includes both of them. China’s growing influence will be very good for The Mekong Region & ASEAN economically. Especially, since exports from China are increasingly being substituted with exports from Vietnam, Thailand & Cambodia. Exports from Thailand actually increased +4% in March.

 

In terms of the ASEAN stockmarkets, the deep bargains have been gone since mid-March, but valuations are still reasonable if one looks forward to 2021 earnings. Banks are a good place to start, since governments are insulating them from heavy NPLs. Construction companies, industrial parks, convenience stores, healthcare and hotels all look interesting too. However, the economic stress has wiped out the small players, and reinforced the hegemony of the big business groups, who are the ones able to benefit from issuing low priced bonds and bank loans. “If you can’t beat them, join them”, best focus on the leaders.

 

Gold miners have performed well, and should be clear winners from the new QE explosion. In 2008-2011 the gold price tripled, it will probably at least double this time as investors seek refuge in an asset that should survive increased currency printing. Emerald Resources in Cambodia, is now fully financed and heading into production next year, with a forward PE of 4X

 

With best regards

 

JEREMY