World and Asian Markets generally rebound in November (although these gains have already been lost in early December), with the Hang Seng Index +6.1% (YTD -11.4%), the MSCI Asia ex Japan Index +5.2% (YTD -13.9%), the MSCI AC ASEAN Index +3.2% (YTD -11.0%), and Thai SET Index slipping -1.1% (YTD -7.4%); Knight Mekong Fund +0.1% (YTD -4.3%) and the Knight Asia Contrarian Fund +0.0% (YTD -1.5%).

As December approaches, one can look back on a year where many macro drivers were surprisingly as expected:

Donald Trump re-negotiated the terms of trade with NAFTA and China, the media failed to dislodge him as elected President, (although the Democrats did succeed in clawing back control of the House); the Federal Reserve began taking money back from earlier QE as indicated, interest rates rose and technology shares deflated; the State department backed Saudi Arabia through thick & thin and tried to aggravate Russia, whilst Russia and Saudi cooperated on raising the oil price; The ECB phased out its bond buying; Britain stumbled through a messy Brexit negotiation with the EU; Bitcoin and other crypto-currencies crashed.

Looking ahead to next year some trends are equally clear:

  1. Trump may shift his attention from trade, to focus more on domestic policies, especially his US infrastructure program, which the House may refuse to finance, and the China bashers may refuse to let build it; the Fed may slow down its tightening, but not enough to trigger a new bull market, and with corporate profits peaking, the US Stockmarket may struggle to find support;
  2. Oil  prices should recover as Saudi glosses over the Khashoggi murder, cooperates with Russia on supply cuts and tries to get the Saudi Aramco listing back on track;
  3. in the face of a rapidly slowing economy, China will expand its own QE (with money staying largely in China and Hong Kong (Connect), and continue to prioritize Asia-centric policies (such as through RCEP & the Asia Infrastructure Bank);
  4. The G20 tweets confirm our belief that both Trump and China want to do a trade deal, but there is a lot of detail to iron out and risk of sabotage from rival elements in the US Government (witness last week’s arrest of Huawei COO and daughter of the founder for violating Iranian sanctions); If there is no US trade deal, China may allow the RMB to slip -10% to soften the impact of trade tariffs, with knock on effects on other Asian currencies; gold may continue to rally on Chinese buying and general global unease.
  5. assuming Teresa May’s BREXIT deal (or subsequent amendment) fails to pass on 11th December, Britain will crash out of the EU, or hold a second Referendum (the outcome of which I wouldn’t like to guess), or tragically hold another election. No big effect on Asia, but may help strengthen the US Dollar.
  6. Luke-warm global growth may lead to a shift back to Asian emerging markets where domestic growth remains strong, and falls this year have wiped out 2017 gains, with stocks offering reasonable value again.

China H shares are depressed to an attractive level, barring an outright recession in China, and stand to benefit from both foreign and Chinese buying through HK Connect. We plan to remain long on China Mobile, China Communications Construction, China Life, Beijing Enterprises, China Merchants and CP Pokphand; as well as special situations such as Fosun.

With oil shares have fallen in line with the artificially low oil price, we are adding to CNOOC, Petrochina, Santos, and PTT. A perennial long-term bull on gold,  we are holding Zijin, Newcrest, Regis Resources, Kingsgate (in anticipation of it restarting production in Thailand post election), and a new micro-cap Emerald Resources, which has 1M ounces in Cambodia.

South-East Asia remains a major beneficiary of China’s economic slow-down, as the Belt & Road initiative takes on more importance, and US /China trade worries cause Chinese manufacturers to diversify production bases. Phnom Penh SEZ reported that a Chinese garment maker, Shenzhou International Group, took almost all their industrial park phase 3, 443,000 sqm in one shot. In ASEAN, Singapore stocks are the quality plays, and we continue to hold OCBC, DBS Bank, and SingTel.

Thailand’s market should rally a head of the planned February election, as a return to some kind of civilian rule will encourage consumption and accelerate government project roll-outs. However, Parliament will be fragmented, with none of the key parties likely to win over 30% of parliamentary seats. Pro-Thaksin Pheu Thai is likely to win the most, followed by the Democrats, Thanathorn’s Future Forward Party (supported by “new generation voters”), pro-military Palang Pracharat, and Bhumjaithai. It is highly likely that the appointed Senate will swing the choice of Prime Minister to one of the minority parties, (unless the Democrat Party allies with Pheu Thai). This may trigger a new round of protests, or lead to a weak government which lacks parliamentary support. Equally if the PM is elected soley by parliament, the judicial oversight will constrain his administration’s initiatives. Reform and democratization of Thailand may take another generation, but hopefully after this election be back on a positive track.

So it remains up to the business sector to drive the economy. We continue to hold construction stocks (CK), real estate (Ananda & Sansiri), industrial parks (AMATA), energy (PTT & BCPG), Agribusiness (CPF & Thai Vegetable Oil), and consumer (CPALL/7-11).

In terms of our funds’ key non-correlated pre-IPO investments, we intend to push ahead on all fronts:

Firstly BRM Agro will complete its 30,000 tons per annum rice mill in March. We are finalizing the appointment of a new SEC/SET qualified auditor and financial advisor for its listing (or gradual “back door listing”) in Thailand in the next 15 months, although we are also exploring the possibility of listing in Cambodia first, followed by a “Depository Receipt” (DR) listing on the new international board in Thailand.

Secondly, Gold Cement, will shortly finalize its 45 year lease on the entire Sinminn cement plant as well as conclude an agreement with a strategic investor from China who would hold approximately 20% of the equity. This would pave the way for a listing (or gradual “back-door listing”) in Bangkok or Singapore next year. GC’s auditor has also just received SEC approval to audit SET listed companies. Making GC a Myanmar public company is also a possibility followed by Thai DR listing.

Thirdly, Max Cement is carrying out its limestone survey program to quantify its limestone reserves in order to supply a planned 2nd production line which would support its planned listing on the Singapore Catalist Board. Initial indications are that there is another 80M tons reserve, which would be ample to double Max’s capacity to 1.8M tons production  and run for 50 years. Max already has IFRS accounts, audited by Deloittes, and a listing sponsor and placement agent have been selected.

Finally Mandalay Myotha Industrial Park is seeking a Singapore listing whilst at the same time entertaining takeover bids from Chinese industrialists due to its strategic location and favourable commercial structure.

We expect at least two of these entities to complete their IPO/listing in the coming 12-15 months.

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