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World and Asian Markets stabilized in September: the Hang Seng Index gained +1.4% (-6.1% 12 Months), the MSCI Asia ex Japan Index +1.4% (-5.7% 12M), the MSCI AC ASEAN Index -0.9% (-2.2% 12M), and Thai SET Index -1.0% (-1.6% 12M), Knight Mekong Fund +0.3% (+14.3% 12M), and the Knight Asia Contrarian Fund -0.2% (+4.7% 12M).

The US-China trade negotiations continued with no end in sight, and minor escalations on both sides. We still believe that President Trump would like to reach at least partial trade agreement with China before the US Presidential election campaign begins in earnest in early 2020, but for that very reason Congress may block any deal. Meanwhile, China has allowed the CNY to weaken a few more percent amid deteriorating economic numbers. The Trump administration also began to float the idea of restricting US investment in China, including the possible de-listing Chinese shares in New York. This comes at a time when investors are celebrating China’s loosening of foreign investment restrictions, and the long-standing Chinese funding of US treasuries is becoming less important. Total US FDI in China stands at about US$ 250 billion and total Chinese FDI in the US $150 billion, but China still has US$ 1 trillion invested in US treasuries. However, with Chinese investment in US treasuries slowly being reduced and growing US institutional investment in Chinese A shares and ADRs, there is an apparently horrifying risk of China becoming a net recipient of US money printing.

Markets focused on the increasing worries of an impending recession, although a mild one might actually be good for emerging Asia markets if it triggered another round of QE. Markets with relatively low valuations like Thailand and Singapore would benefit from increased foreign capital inflows, as investors perhaps underweight HK & China. BREXIT is looking increasingly like another Y2K with even the worst case hard BREXIT factored in, and both sides likely to stick to zero tariffs until a final definitive free trade deal is done. Politics has been both distracting and entertaining on both sides of the Atlantic with the media and Congress frenzy surrounding President Trump’s suggestion the Joe Biden’s son be investigated for corruption in either Ukraine or China, and Prime Minister Boris Johnson facing all kinds of allegations dredged up from the past (and present). The Elizabeth Warren-Trump contest next year will be another circus, and too close to call, but is unlikely to lead to a significant shift in US trade policy towards China. The Chinese government may seek a resolution this year rather than risk an even more committed foe after the 2020 election.

In the commodity markets, the main excitement last month was the drone attack on Saudi oil facilities, possibly intended to derail the IPO plan for Saudi Aramco. Although blamed on Iranian proxies, many elements including domestic ones within Saudi Arabia, would be happy to see the Aramco IPO fail. Neither the Saudi military nor their US allies took any retaliatory action, meaning either that they know it wasn’t Iran or they are wary of escalating the situation in the Gulf. The mild response from the US makes one wonder how aggressively they would protect their allies in Asia. However, the US did take the opportunity to announce deploying troops on Saudi soil something that has been resisted in the past.

In Hong Kong, the government’s withdrawal of the contentious extradition bill was seen as “too little, too late” and hard line elements in the Hong Kong protest movement have continued to escalate activities, demanding greater democracy and guaranteed autonomy from China. The HK Government has promised to address the causes of the youth disenfranchisement, namely the unaffordability of housing (as with many capital cities around the world) which is exacerbated by artificially low USD interest rates arising from the USD/HKD peg. I wonder for the first time whether the peg might go, as part of China’s “de-linking” from the US. Low interest rates have been a disastrously conceived global policy that has inflated asset prices for the rich while starving pensioners and savers seeking safe yields. In Hong Kong and elsewhere, the backlash against the asset rich is likely to increase, and manifested in public pressure for higher asset taxes.

Eventually the protests in Hong Kong will end, and many shares are now attractive on a long-term basis, including Hang Seng Bank & Hong Kong Land (at 0.3X book), Chinese H shares such as China Mobile, China Communications Construction, Beijing Enterprises & Conch Cement to name a few. Over the medium term, Hong Kong’s upper middle class will seek to have secondary bases in Taipei and Bangkok as the clock ticks towards the possible expiry of the “one country, two systems” arrangement with China in 2047. Singapore shares also look interesting, as the prime beneficiaries of the turmoil in Hong Kong.

Meanwhile, Gold fell back to US$ 1,460/oz after reaching US$ 1,550/oz earlier in September. Gold shares, which had run on substantially ahead of the commodity could soon become buys again. Kingsgate remains a compelling special situation as the only significant gold play in Thailand and with the increasing likelihood of a compensation compromise with the Thai government ahead of November arbitration in Singapore. If KCN goes back into production with its cash costs of $800/oz, it would stand on a PE of 2X. KCN also announced a 10% share buyback, utilizing a small part of its political risk insurance payout; and also that it is entertaining offers for its Chilean silver project.

The three strategic investments in our portfolios are expected to be publicly listed in the next 12 months: BRM Agro has already signed agreements with its Canadian sponsors for listing on the Canadian Stock Exchange before the end of 2019 to be followed by a likely Thai secondary/DR listing in 12-18 months; Gold Cement plans an RTO through a UK, Singapore or Thai listing soon after increasing its stake in the Sinminn cement plant from being a 49% JV to be a wholly owned 45 year leasehold; and Max is slated for listing on the Singapore 2nd board. BRM’s CSE listing will be at a 40% premium to current valuation thus positively impacting both ACF & KMF, and Gold Cement’s at over a 100% premium thus impacting AMF, KACF & KMF.

Please note that the existing Knight Mekong Fund (Luxembourg SIF) has migrated and merged with mirror fund Knight Mekong Strategy Fund (Bermuda) at the end of October. Knight Mekong Strategy Fund (KMSF) will continue as a hybrid strategy with a mix of pre-IPOs, frontier market positions in Myanmar, Laos, Cambodia, and liquid Mekong plays in Thailand, Vietnam, Singapore & Hong Kong.

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