Knight Asia Newsletter February 2020

Asian Markets weakened further in February as the Wuhan flu (COVID-19) continued to spread: the Hang Seng Index fell a modest -0.7% (-7.7% YTD), the MSCI Asia ex Japan Index -1.3% (-5.4% YTD), the MSCI AC ASEAN Index -6.4% (-11.2% YTD), Thai SET Index -12.5% (-19.4% YTD), FTSE Vietnam -5.8% (-9.9 % YTD), Knight Mekong Strategy Fund -1.1% (-1.6% YTD), and the Knight Asia Contrarian Fund -0.2% (-0.6% YTD).


The media frenzy surrounding COVID-19 has followed the viruses’ spread to South Korea and Japan, and knocked -9.6% and -6.2% respectively off of their equity markets. US and European markets also tumbled (Dow -12% and Euro STOXX -8.5%). In the US case, this was due to worries about impact on the global supply chain after a series of profit warnings from companies such as Apple, whilst gold soared then fell on dashed hopes of aggressive QE from the Fed. In fact, companies would have stocked up on inventory ahead of the scheduled Chinese New Year so short-term supply chain worries may be overblown. A more genuine worry might be the prospect of tax increases under a Bernie Sanders government, but lets not get ahead of ourselves. The Democrats would probably prefer to lose with Joe Biden than risk losing both the White House and the House given Bernie’s position on the extreme left wing of the party.


In Europe, the sudden outbreak of COVID-19 in Northern Italy caught markets off guard and the fact that the respiratory illness cropped up first in the most polluted part of Western Europe is probably no coincidence. Cases then started to appear in communities in France, Spain, UK, Nigeria & the USA often with no apparent direct linkage with China or other Asian outbreaks.


The fact that the virus causing COVID-19 is becoming widespread without triggering more widespread illness in its path implies that many people are relatively unaffected. The media obsession of the spread rather than its actual severity may soon change, and a lot of embarrassed politicians will desperately switch their focus to repairing the massive economic damage done by the “Media Flu”.


Once the WHO declares a pandemic, as they did with Swine Flu (H1N1) in 2009, the containment effort will subside and emphasis will be on slowing down the internal spread until summer. During summer, it is highly likely that some kind of vaccine may be released with the Chinese already testing one from Oxford University on mice in Zhejiang, with human trials to follow soon. Patients in China are also being given plasma from recovered patents as a serum. The media is switching from using the illness as a way to isolate China, to attacking the US government for not taking it seriously enough. Generally, the US and European response seems proportionate to the threat with the US Surgeon General asking people to stop buying face masks since they don’t work, and the needless demand is creating a shortage for the hospitals and health care workers who actually need them.


So far the Year of the Rat has been true to form (1996 & 2008) although at least in terms of markets, Hong Kong and China have proven relatively resilient thus far. Once the virus is truly under control, China will embark on massive QE and other economic stimulus to support its banks and SMEs. China will also remember who their friends were during this difficult time. Australia and the USA will likely be penalized for closing off flights early and for isolationist media reporting. Japan and Thailand on the other hand may be favoured, and China’s “Asian Pivot” will continue. If the UK’s vaccine works, we’ll get our free trade treaty.


The Hong Kong government has already started with some token stimulus measures, handing out US$1,250 to every Hong Kong citizen and permanent resident. Although any goodwill they generated may be offset by last week’s arrest of suspected financiers and instigators of the protests, including Apple Daily owner Jimmy Lai. The temporary lull in Hong Kong protests is over, and with a new excuse to wear face masks people may become more emboldened once again.


Cases of the coronavirus in South-East Asia remain extremely rare, probably due to the hot humid weather. Despite the continued use of finger-print machines at Bangkok Airport, there has only been a handful of cases of human to human infection in Thailand, all other cases were fly ins. The Thai healthcare system is also rated #6 in the World for pandemic preparedness, the only country in Asia ranked in the top 10 by John Hopkins University. Unfortunately, this has not stopped tourist arrivals collapsing -74% in February, and the stockmarket -20% YTD. European tourists are also staying home even though Influenza A (H3N2) remains the greater threat in their own countries.


With 400 million Chinese locked in their homes dreaming about a beach vacation, there is no question that Thai tourism will recover dramatically in the 2nd half of the year. We hope that Thai hotels have taken this opportunity to refurbish, and re-train (rather than re-trench) their staff.


The supply chain panic will reinforce the shift in manufacturing capacity from China to Thailand and the Mekong Region. Having reserved large rafts of land last year, we expect Chinese FDI into Thailand to crystallize in 2020 giving a boost to the lackluster GDP growth. China will continue to expand its influence in Asia, pushing forward its “Belt & Road” plan and ongoing sponsorship of Cambodia & Myanmar. Vietnam has been similarly hit in terms of tourism and its own stock market, but it will also be a beneficiary in the medium term. Now is an excellent time to increase investment in both Thailand and Vietnam.


Politically in Thailand, the Future Forward Party was dissolved for receiving loans from its founder, whilst similar cases against other political parties have not yet been pursued. Future Forward has morphed into “Future Forward Movement”, with students mobilizing on campuses and wearing face masks to avoid facial recognition. Although the Movement may become more widespread, in past years politics has had little impact on the markets. Additionally, this will put ever more pressure on the government to perform economically, and some kind of power reshuffle is likely. The Thai government’s long delayed infrastructure projects may come to fruition this year together with other stimulus measures to support the overly depressed banking, construction and property sectors.


Cambodia has so far stayed clear of the Coronavirus outbreak, although it earned kudos for allowing a stranded cruise ship to dock. Inexplicably, Cambodia, Laos and Myanmar were added to a very short list of high virus risk countries by the UK !


NAGA Hotels and Casinos has dropped to an attractive level, despite having only 40% Chinese customers (60% ASEAN). Cambodia’s largest bank, ACLEDA, is also going ahead with a partial IPO on the CSX although seemingly without having solved the lack of share custody issue for foreign institutional investors.


Our key investee company there, BRM Agro is progressing with its planned listing on the Canadian Securities Exchange. BRM’s IPO proceeds will be used to initially double its annual rice milling capacity to at least 40,000 tons resulting in a forward PER of 7-8x. BRM plans a Thai secondary/DR listing within the following 12-18 months.


Gold Cement, based in Mandalay, is soon to increase its stake in the Sinminn cement plant from being a 49% JV to be a wholly owned 45 year leasehold. Post lease, GC has prepared plans to list in Singapore at a substantial premium to the current valuation. EY is undertaking a new valuation on the company post lease.


The Knight Greater Mekong Fund (KGMF), our new daily traded UCITS fund, is now open for subscription. KGMF sits on Banque Pictet’s Luxembourg Protea platform. KGMF emphasizes liquid Mekong plays in Thailand, Vietnam, Singapore & Hong Kong, as well as augmenting performance through investment in select special situations in the Region. As with KMSF, tactical cash allocation will be used to reduce beta volatility. There is a low fee “Seeding” class of shares for early investors through to the end of March. KGMF will aim to perform somewhere between SKFM’s Thai mandates +15% per annum, and Knight Mekong Fund’s +10% p.a.


With best regards