Knight Asia Newsletter February 2024
Global markets rallied in February with the MSCI AC World Index +6.6% (YTD +4.7%), the Hang Seng Index +6.6% (YTD -3.1%), the MSCI Asia Ex Japan +5.5% (YTD -0.3%), the MSCI AC ASEAN Index +1.7% (YTD -2.0%), the Thai SET Index (USD) -0.5% (YTD -7.6%), and the FTSE Vietnam (USD) +6.3% (YTD +5.0%). Our Knight Mekong Strategy Fund was +0.1% (YTD -0.2%); and our Knight Asia Contrarian Fund was -0.2% (YTD -0.6%).
For the past month, ASEAN markets were mixed, whilst HK/China enjoyed a post Chinese New Year rally encouraged in part by government stimulus and the ongoing National People’s Congress meeting. As we enter the Year of the Dragon, we can expect HK/Chinese markets to initially stabilize and then begin to move up. The Western institutional “boycott” of Chinese capital markets has had a temporary impact, channeling money into India at 5X China’s valuation, and pouring lemming-like into the Japanese market, but ultimately valuations will adjust especially given the ever widening gap. After HK/China has had a good year, in 2024 hopefully, institutions will have to come back, or risk underperforming their benchmarks.
The US presidential primaries are essentially now over with the only uncertainty now being who will the Donald choose as his running mate. Recent polls are reinforcing the possibility of a Trump 2 Presidency. We can worry about more tariffs on Chinese goods in 2025, but be relieved that this should dampen Pentagon independence and military involvement overseas, and constrain bureaucratic creep(s). “Aging Disrupter” vs “deep state puppet”, not great choices for America.
In the near term, interest rates are the bigger worry. We remain concerned that the market may end up temporarily dictating interest rates instead of the central banks. Although inflation is theoretically under control, the governments of the US and Europe have had to fund huge deficits and debt rollovers in 2024, and may need to bid up market rates for funding. The Central Banks will be reluctant to intervene with QE again since their money creation may lead back to higher inflation. Of course, eventually this will be the only option (2025?).
In Thailand PM Srettha Thavisin’s government has succeeded in boosting tourism numbers, especially in respect to Chinese visitors, which at 200,000 per week are approaching pre-pandemic levels. Chinese FDI is also picking up with land plots on the Eastern Seaboard bought during 2019 now being actually physically developed with new industrial capacity. Additionally, several new Chinese EV auto plants have been announced. Casino legalization seems to be on the cards too…
Thailand-Cambodia relations were given a boost by the unofficial visit of former PM Hun Sen to meet his old friend former PM Thaksin. Hun Sen will be running for election as President of the Cambodia Senate, which we expect he will win. After Hun Sen’s visit, we suspect that a resolution of how to proceed with the development of the massive gas fields in the disputed waters in the Gulf of Thailand may soon be resolved.
Thailand is also actively brokering a resolution between the opposition forces and the Myanmar military. This will likely result in greater autonomy for the seven states in the highland border regions and in a general election happening sometime next year under the new proportionate representation system. With 4-6 million Burmese nationals now working in Thailand, the mutual dependency is clear. Burmese construction crews, factory workers and hospitality industry staff sending money home is probably now Myanmar’s largest source of income. At the high end, however, increasing numbers of wealthy Burmese are buying properties in Bangkok, whilst others are seeking treatment at Bangkok hospitals (a shift from their past preference for Singapore).
Gold prices rallied strongly in February, finally maintaining above US$ 2100 per ounce. It is unclear what the trigger was, apart from modest Chinese accumulation. Gold certainly seems more secure than US government bonds as a place to park US$ surpluses… maybe the US government has thrown in the towel? Gold shares, however, have not confirmed the breakout, and they are usually a lead indicator on the commodity price.
Our investee cement companies are ticking over nicely, although shortage of consistent electricity supply is a major issue, and needs to be supplemented by expensive diesel generator power. In the case of Shan Yoma (formerly KBZI Cement), we intend to resolve this with building a solar power plant under our other investee company Gold Cement. Local financing is still available, as are trade credits for Chinese equipment.
In Cambodia, our key investee company BRM Agro is in negotiations with various DFI financial institutions for loan/equity capital, ahead of its public listing in Cambodia (or possibly Hong Kong). Rising rice prices are shoring up Cambodian rice land values in the Kampong Thom area, where water is readily available due to its proximity to the Tonle Sap Lake, irrigation canals and other reservoirs. Chinese buyers are snapping up land as part of China’s food security push. Southern China, Vietnam, and Northeast Thailand are all facing a potential drought this year leading to massively reduced rice exports from the 4Q24 onwards. To save water, all these countries have restricted the growing of second rice crops in several key rice growing areas except BRM’s Kampong Thom area, where water is more plentiful. European buyers are lining up to bid on BRM Agro’s future rice offtake.
With Best Wishes
JEREMY