Asian Markets fell back in June, with the Hang Seng Index -5.0%, MSCI Asia ex Japan Index -5.2%, MSCI AC ASEAN -7.1%, Thai SET Index -10.3%, our funds also slipped with Knight Mekong Fund -0.6%, Knight Asia Contrarian Fund -1.0%.

After the disappointing North Korean/US Presidential Summit on 12th June, the first well discounted US$ 34 billion US trade tariffs on China took effect on July 6th, and China’s tit-for-tat tariffs hit the farming heartland of the US. Regardless of the outcome of trade negotiations, Asian countries are now more determined than ever to reduce dependency on  US exports. This will manifest itself in an acceleration of the ratification of CPTPP (TPP ex US), and the prioritization of China’s RCEP trading block and “One Belt, One Road” initiative, both of which will encourage intra-regional trade. The ASEAN meeting in Tokyo on 1st July, combined with the first major RCEP meeting held outside South-East Asia is an early indication of renewed urgency.

It is hard to quantify exactly ASEAN’s exposure to US trade, since up to half of its trade is termed “intermediate goods” imported to & from China, Japan & Korea for re-export/assembly; but certainly the market reaction in emerging Asian stockmarkets has been excessive. Ultimately ASEAN will benefit greatly from increased Chinese FDI, and infrastructure investment, and this is not discounted in the markets. The Mekong countries, especially Cambodia and Myanmar, are the prime beneficiaries of Chinese largesse (with strings attached), but Thailand as the most China-friendly destination in ASEAN is also enjoying the flows. Chinese spending on tourism, shopping, healthcare, and residential condo purchases are a key driver in Bangkok/Thailand’s economy.

Higher oil prices after Trump re-imposed sanctions on Iran, ahead of the Aramco listing is good news for the energy stocks, which remain depressed after oil’s earlier correction. We added to holdings in Petrochina and PTT. The latter after the Thai Government’s populist move to cap diesel and LPG prices threatens market leader PTT’s margins, but at a PE of just 10X, and likely support from the government oil fund the stock seems oversold.

Generally, we expect the foreign wave of end quarter emerging markets selling to abate, and domestic bargain hunting to resume after the World Cup final. ASEAN markets were particularly hard hit, as foreign investors pulled money out of emerging markets, triggered by currency weakness in Argentina, Brazil and Mexico. The fall-back in South-East Asia has presented an exceptional buying opportunity, particularly in Thailand and Singapore, on a valuation basis. Vietnam has also re-tested its low, although it remains expensive, and we look to buy below 850 on the Index.

The best news of the month was Myanmar’s announcement that the new Companies Act will take effect on 1st August. The Act enables all companies to have up to 35% foreign ownership without being classified as a “foreign owned company”. This will facilitate the listing of various companies on foreign exchanges, starting with Mandalay Myotha Industrial Park on the Singapore 2nd board; Max Myanmar Cement on the Singapore Exchange, and Gold Cement of the Thai exchange. Gold Cement is also planning to buy a stake in KBZI Cement in Shan State to broaden its base ahead of the listing.

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