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Asian Markets see-sawed in February, as investors locked in gains and worried about interest rates, with the Hang Seng Index -6.2%, MSCI Asia ex Japan Index -5.0%, MSCI AC ASEAN -1.5%, Thai SET Index -0.2%, Mekong Fund +0.1%.

Markets corrected in February, following the 2017 rally’s overflow into January. With stock valuations riding high, and tech stocks priced for perfection, a pullback was inevitable, and recent falls have been insufficient to adjust valuations. Many individuals and institutions had over-weighted equities in an attempt to substitute capital gains for the now elusive bond yields, this overweight will take some time to unwind. The most likely scenario for the US market is a long grinding bear market with a range-bound downtrend all year, with tightening liquidity as the new Fed Chief Jerome Powers begins to prioritize inflation avoidance over propping up the banks, and corporate America begins to invest part of their cash piles. Interest rate worries, combined with the spectre of a full-fledged trade war between the US and China should keep the markets on edge. The early March rally on the economically irrelevant (unless representing a secret trade deal with China) meeting between President Trump and Kim Jong Un, may present a selling opportunity.

On a positive note, after his success with tax reform, President Trump may now try to go forward with his infrastructure priority, including encouraging US companies to repatriate their offshore money and invest in the US. Apple has already announced it will bring home US$ 250 billion, and invest even more than that in new facilities in the US.

Another negative last month, was the 25th February announcement that the Chinese politburo is proposing the abolition of Presidential term limits. Many in China fear that this is a backward step to the era of Mao, with Xi Jinping intending to stay on way beyond his 2nd 5 year term to 2023. However, there was already no term limit for leadership of the Chinese Communist Party, which is far more important. So the change in the largely ceremonial position of President probably indicates that, unlike his predecessors, Xi wishes to lead China’s international projection from the front. The move could back-fire, since it confirms the growing belief in Western countries that China’s whole reform and business opening was a sham. However, the change bodes well for Xi’s signature initiatives, especially the “One Belt, One Road” infrastructure strategy. Many Asian countries will benefit from this, provided they can avoid falling into a “debt trap”.

The Thai Stockmarket remained steady last month, buoyed by the announcement of a share split for PTT, the largest listed stock.  The market is reasonably valued, especially in the banking, energy, property and agribusiness sectors, and should continue to perform well this year. The strong baht may have some impact on the manufacturing sector, which in any case is steadily moving to Vietnam and Cambodia (we have begun buying Hana micro-electronics at these oversold levels).. One suspects that Chinese money is finding its way into Thailand, ahead of China joining CRS; at 31.30, the Baht still has a long way to climb to its pre-1996 level of THB25/1USD. Tourism seems so far unaffected, and the Airport Authority of Thailand is pushing ahead with almost doubling the capacity of Bangkok airports to handle 170 million arrivals per annum. Every hotel in Bangkok was fully booked 2 weeks either side of Chinese New Year. Wealthy Chinese immigration, perhaps escaping growing authoritarianism at home, may increase massively in the coming years. Whilst this would be good for the property market and retail spending, it could lead to ethnic tensions.

With the high liquidity in the Thai market, more IPOs should be floated on the SET and MAI, including some from the Mekong Region. One of our portfolio holdings, Phnom Penh SEZ, has already announced plans to be the first Cambodian company to apply for secondary listing on the SET. Our investee company BRM Agro is planning to list on the Thai MAI 2nd Board, and has already received positive feedback from regulators and investment banks; Also, LVT Engineering (to be renamed Thai Mekong Investments)  likely to be relisted on the MAI; and KTECH should finally relist in March if it shows a full year profit.

As expected, Thai politics is heating up, with increasing pressure on Deputy-PM Gen Prawit, to step down over public scrutiny on his luxury watch collection. Recent polls showed 95% suggesting he step down. The Thai public is losing patience with the interim government especially after its proposal to delay the November election by 3 months. Registration of new political parties has already begun with over 50 being proposed, including one yet to be announced backed by PDRC leader Suthep. With the new constitution treatment of proportionate representation (party list) seats, parliament is likely to be quite fragmented. On the positive side, we expect the government to try to accelerate finalising construction contracts in their final year in power, and we have added to our holdings in this sector on weakness.

In Myanmar, the NLD Government lead by Daw Suu Kyi, continues to wrestle with solutions for the Rakhine refugee crisis, but seems to be more engaged now. Western governments and media continue to express disappointment in the weak response thus far. Meanwhile the government has begun to prioritize economic issues, and has indicated an imminent cabinet reshuffle to re-energize the policy-making. After the passing of the new Companies Act in November, we eagerly await the publication of new regulations allowing foreign participation in the stock market and OTC markets. Additionally, the State Councillor’s various trips to China may result in the finalisation of the Kunming –Mandalay-Naypidaw railways and roads as well as other Chinese FDI. The Central Bank’s 2 year extension of the deadline for Myanmar banks to recognize NPLs and recapitalize, may lead to a rash of foreign tie ups following the implementation of the Companies Act. Most importantly, the government’s plan to reduce the tax amnesty fee from 30% to 3% may bring huge amounts of hidden money back into the system. We are adding to SMI (Yangon Duty Free) at depressed levels, as well as investing in Oxley Holdings (OHL) after it secured the redevelopment of the Yangon Railway Station.

 

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