Knight Asia Newsletter March 2025
Asian equity markets were mixed in March before falling off a cliff in early April, with the FTSE Vietnam (USD) up +4.7% (YTD +7.3%), MSCI AC ASEAN Index +0.6% (YTD -2.6%), the Hang Seng Index +0.8% (YTD +15,3%), MSCI Asia Ex Japan -0.2% (YTD +1.4%), and the Thai SET Index (USD) -2.5% (YTD -15.5%).
Global trade remained in the spotlight during March with the threat of US tariffs bringing everyone to the negotiating table, but not fast enough. It is clear why the EU has been targeted as the US’s primary commercial competitor. The EU should now focus on building bridges with resource rich African & Middle East countries as well as reconciling with Russia if possible. The Tripolar World was already half formed, even before the new Republican administration, but it may now be crystallized for decades to come.
President Trump’s long awaited “reciprocal tariffs” were announced on April 3rd, taking effect on April 5th & 9th. Needless to say, global stockmarkets crashed ! The tariffs were simplistically applied country by country according to the formula: Trade Surplus with the US / Total exports to the US x 50%; apparently under the assumption that any country with a trade surplus with the US must be cheating. Countries with a trade deficit with the US were charged a flat 10% tariff anyway.
It is true that many countries create regulatory barriers to entry for US goods as well as levy import taxes. Just look at luxury car imports to Thailand at between 100-300%. There is also the argument that many countries keep their exchange rates artificially low, as proven in the gap between nominal GDP and PPP GDP. Thailand’s PPP GDP is 3x its nominal, meaning that the correct level for the Thai Baht should be about 12 : 1 US$; and the CNY should be CNY 4 to the US$. Asian currencies look like great investments in the current scenario, but even that is not certain, since China might respond to the tariffs by devaluing the CNY.
Emperor Trump is challenging the arrangement that has existed since the end of WW2: The US opened its market, in exchange for countries reinvesting their surpluses in US government bonds. Now the great reset is up-ending everything. If Trump succeeds in engineering a trade surplus for the USA, the next major problem will be a crisis in US federal bond financing, and rocketing interest rates. This would be exacerbated if countries encourage an upward revaluation of their currencies, by converting trade surplus money back to local currencies, as they are supposed to. They may also unload US treasury bills at some point. It remains unclear if Trump wants a weak dollar, since he still demands that commodities continue to be denominated in US$, and that creditor countries continue to hold US$ as the bulk of their forex reserves.
With all this trade friction and geopolitical strife, it is hard to avoid the conclusion that inflation will rise again in the US and Europe triggering recessions. Certainly the over-priced US stockmarket has a long way to fall. US imports account for 10% of its GDP, whilst China exports to the US are just 3%, so theoretically the US economy will be worst hit initially. Countries have so far chosen either to respond either by imposing their own incremental tariffs on US sourced imports, or by caving in immediately and removing existing tariffs (which perhaps shouldn’t have been there in the first place ?).
China has placed itself squarely in the first camp, responding quickly by imposing an identical 34% tax on US imports. Trump is now threatening additional 50% taxes on Chinese goods. We don’t expect either side to back down quickly, so both most prepare to source all goods elsewhere. I suspect Trump may soon exempt selected companies such as Apple, provided they commit to re-shoring. China will replace future Boeing purchases with Airbus & domestic COMAC. There are many implications of all this, with EU & China theoretically moving closer together, but ideological differences could be an impediment. There are also questions whether China will begin actively exiting US treasury bonds, and Asian wealthy families begin repatriating their money to Asia. The biggest losers in all this are probably US companies share prices. Asia will become even more self-sufficient. Deals like CK Hutch port sale to Blackstone may be suspended. Li Ka Shing’s timing was almost perfect (as usual).
Vietnam & Israel fall into the second camp, Japan & ASEAN will probably follow. Southeast Asian governments will try to placate the current US government by relaxing trade barriers, and hope to benefit in the medium-term from China playing “hardball”. Vietnam has already offered to remove all trade barriers on US goods, including just 9.4% import taxes (vs Trump’s 46% !), but it is unclear whether they will revalue their currency up 70% to match PPP. ASEAN should focus on regional cooperation and avoid the crossfire. There are signs of ASEAN coming back together with PM Anwar inviting ex-Thai PM Thaksin to be his adviser; and the new Indonesian President Prabowo looking to raise Indonesia’s influence and trade outside its own massive 300 million person domestic market. This group of seasoned statesmen, including the Sultan of Brunei, may forge real cooperation within ASEAN in the new multi-polar world. Most ASEAN countries will seek ways to quickly rebalance trade with the US, by buying natural gas, agricultural products, armaments and aeroplanes. Trade deals will take many months to conclude, but the US may delay tariffs on countries which are moving in the right direction.
As an additional shock, on March 28th, the Mekong Region was stunned by a massive 7.7 richter scale earthquake near Mandalay in Myanmar. The tremor was felt strongly in Bangkok, 1300 kms away, and many buildings suffered superficial, but generally non structural cracks. One half-finished sub-standard building collapsed. However, most damage in Thailand was psychological, with an uptick in house buying expected (until the next flood, at which point condos will be back in vogue). Over in Myanmar the destruction was massive, the extent to which is not yet clear, but indications are that at least 1.5 million people were displaced and over 10,000 low-medium rise, multi-story buildings destroyed.
Mandalay and Naypidaw Airports have already re-opened and are receiving 24 hour relief supply flights. The Chinese government was quick to send relief workers in large numbers, and will no doubt consolidate their influence in Northern Myanmar. One can only hope that a disaster of this scale will trigger a “coming together” and rapprochement between the Myanmar Military and the various rebel groups, and disparate elements in the semi-autonomous states. Perhaps it could also accelerate the constitutional formation of a federal system in Myanmar. On the business front, at least 2/3 of our cement plants: Max Cement (Naypidaw) & Shan Yoma (Taungyi) were undamaged, although we may need to give out free cement for a while. All Mandalay based plants have been closed until further notice.
We have been active through the Burmese rotary clubs and other NGOs in assisting in mitigating the disaster. Anyone wishing to contribute to the relief efforts in Myanmar, please send money either to our affiliate Knight Delarosa Foundation, a registered charity in Hong Kong (IRD : Charitable Donations and Tax-Exempt Charities), which will send it onwards to various rotary clubs & NGOs in Myanmar; or directly to the Shwe Yamin Foundation which is registered as an NGO in Myanmar itself (www.syfmyanmar.org ).
With Best Regards
JEREMY