World and Asian Markets slipped after last month’s gains: the Hang Seng Index fell -2.7% (-2.8% 12 Months), the MSCI Asia ex Japan Index -2.2% (-5.3% 12M), the MSCI AC ASEAN Index -1.2% (+3.0% 12M), and Thai SET Index -1.3% (+8.5% 12M), Knight Mekong Fund -0.9% (+8.4% 12M).
The truce between US / China didn’t last long, with Trump imposing 10% tariffs on an additional US$ 300 billion of Chinese exports to the US on August 1st. Combined with a less-dovish-than-expected statement from Fed Governor Powell, this hit financial markets and the oil price hard in the final days of July and early August. The US / China trade war caused a first half drop in trade of -14% from US$ 314B to $271B, putting China in 3rd place behind Mexico and Canada as a US trading partner, however, the deficit fell just 0.7%,still at US$ 55B for May and $30B in June, and China’s surplus with the US is over 10X larger than Mexico’s. For example 42% of apparel sold in the US and 69% of footwear originates from China and is unlikely to be replaced by US production. We still believe that the US would like to reach a trade agreement with China before the US Presidential election campaign begins in earnest next year. With the trade contagion now spreading to Japan/South Korea relations, there is not much good news around, except perhaps in Vietnam.
In Hong Kong, nine weeks of protests is beginning to take its toll on the property market and tourism. What started as a protest against the new extradition bill, with the help of some heavy handed police tactics early on, has morphed into a wholesale opposition to the Hong Kong establishment, and demand for full democracy. Arguably the core problem is the unaffordability of housing, a problem in capital cities everywhere, brought on by the misguided QE policies in the West. Old people are house rich and cash poor, young people lack both, only the upper echelons have benefited. The political toll of years of QE will impact the world for the next decade, as Governments try to rebalance the wealth gap, without abandoning low interest rate policies and bankrupting the banks. The Hang Seng Index is approaching it 25,000 support level, which should present a buying opportunity; although if the PLA gets involved, a free fall to 20,000 is possible. Hong Kong listed Chinese H shares may offer the best value, having fallen in sympathy with HK shares and on worries about the Chinese domestic economy.
A summer drift in stockmarkets is normal, and new impetus may emerge in the Autumn. A key bullish/bearish trigger is now clearly on the horizon in Europe, as Boris Johnston the new British PM, with a theoretical 1 seat majority in Parliament, begins his “do or die” push to honor the BREXIT referendum by October 31st. Simplistically put, he has to convince Europe to abandon the Irish back-stop or lose the vital support of the DUP. With a bit of help from the US, this is possible, but with a 50/50 chance at best. According to oddschecker there is an 80% chance of Brexit happening this year, 60% chance of no-deal Brexit, and 20% chance of Parliament revoking Article 50 to cancel or postpone Brexit. Without an agreed exit deal with Europe, or unless Parliament resolves to revoke Article 50, the UK will automatically leave the EU on October 31st. This might trigger a crisis in the Pound and a sell-off in markets.
Meanwhile, a combination of trade friction and heightened of tensions in the Gulf of Arabia, has helped the Gold power ahead to US$ 1440, having broken the US$ 1370 barrier and entered a new bullish phase last month. As a momentum trade, Gold remains one of the few positive ones. However, gold shares have run on substantially ahead of the commodity. We are adding to Kingsgate as a special situation, the only significant gold play in Thailand, in anticipation of a compensation compromise with the Thai government ahead of November arbitration in Singapore. If KCN goes back into production, with cash cost of $800/oz, it would stand on a PE of 2X. The company also announced a 10% share buyback, utilizing a small part of its political risk insurance payout; and that it is entertaining offers for its Chilean silver project.
Meanwhile, the Thai post-election SET rally lost steam as returning PM Prayut finally formed his coalition Cabinet, and faced his first grilling in Parliament. As expected, the smaller coalition partners are moving fast to implement their plethora of promises, including propping up agricultural prices in the South and legalizing medical cannabis. We are also seeing increased activity in the transportation infrastructure sector, starting with Bhumjaithai management changes at the Ministries. On the other hand, the Government has postponed its key campaign pledge of increasing the minimum wage, sensing that combined with the strengthening baht, this could be a deadly combination for FDI. It is likely that the Government will soon cut interest rates to weaken the baht and boost the economy; property shares, overly depressed by slow transfers and delayed launches, could be key beneficiaries.