Knight Asia Newsletter January 2024
January saw the global markets starting the year on a weaker note with the MSCI AC World Index -1.8%, the Hang Seng Index -9.2%, the MSCI Asia Ex Japan -5.5%, the MSCI AC ASEAN Index -3.6%, the Thai SET Index (USD) -7.1%, and the FTSE Vietnam (USD) -1.3%. By comparison, the Knight World Horizon Fund was -4.8%, the Knight Mekong Strategy Fund -0.3%; and the Knight Asia Contrarian Fund -0.4%.
Asian markets fell during the tail end of the Rabbit year, but we can expect better things in the Year of the Dragon. Western economies are likely to slow down dramatically as higher interest rates bite, so China’s cyclical rebound is key. First step is to sort out the property market, this is likely to take the form of province by province REITS to finish presold condos & housing, backed by the Central Government. A stockmarket support fund is also being mooted. As western markets lose their lustre, investment flows may rediscover Chinese markets and their Southeast Asian neighbours. China will emphasize domestic and RCEP initiatives.
The recent Presidential election in Taiwan resulted in a second term win for DPP candidate Mr Lai Ching-te, but 60% of Taiwanese voters opted for pro-China candidates, and the KMT gained seats in the House. Therefore, we don’t expect further deterioration of cross Straits relations. The next major election is in Indonesia, with Gen Prabowo Subianto the likely winner, accompanied by Gibran Rakabuming (Jokowi’s eldest son) the likely victors. The new Indonesian government may to continue to be non-aligned and focused on domestic issues. With the Philippines more and more aligned with the US, only Malaysia is a candidate to join the Thailand/China centric continental ASEAN (or “Mekong Region”).
US primaries are underway and initial results 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. The bigger threat is the direction of interest rates. Although inflation is theoretically under control, the US has to fund over US$ 3 trillion in deficits and debt rollovers in 2024 (spending US$ 1.3 trillion on interest on old debt at low rates plus a similar amount on the military). Europe is in a similar boat. It seems possible that these governments may need to bid up market rates for funding, since the usual QE/Central Bank money creation may lead back to higher inflation. Of course, eventually this will be the only option, but we could have large rate rises first.
Thai PM Srettha Thavisin’s manic globe-trotting seems to be bearing fruit. Tourism numbers are bouncing back, and the reciprocal visa free arrangement with China is expected to return Chinese tourist numbers to pre-pandemic levels. Similarly with FDI, where many long-pending projects will move ahead, mostly on the Eastern Seaboard. This will include the Bangkok – Chonburi – Pattaya rail link. The Chinese Foreign Minister, Wang Yi, just completed a four day visit the Thailand, and President Xi Jinping has been invited to visit Thailand next year for the 50 Year Anniversary of Thailand/PRC relations.
Perhaps even more significant is PM Srettha making great strides in pulling the Mekong countries together. Examples are the opening of a land crossing from Thailand to Siem Reap/Angkor Wat, imminent access to the Preah Vear Temple, and a resolution of the development of the massive gas fields in disputed waters in the Gulf of Thailand. Similarly in Myanmar, Thailand is actively brokering a resolution between the opposition forces and the military government, beginning with the creation of a “safe zone” on the border. If elections happen in Myanmar under the new proportionate representation system, one suspects that Thailand will have had a hand.
Over the next decade, Thailand, Myanmar, Cambodia & Laos are likely to integrate more and more, becoming effectively one economic area, with strong links to China. Bangkok’s status as a service hub, for multi-national HQs, healthcare, retail, international schools, will continue to grow. We have confidence that the immigration/visa rules will be simplified, and eventually the banking system will be modernized to allow multi-currency accounts and tax free free flow of remittances.
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. To save water, Cambodia itself has just 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 for The Dragon Year !
JEREMY