The Mekong Fund gained +1.4% in June. Asian Markets put in mixed results in June, with the Hang Seng Index +0.4%, MSCI Asia ex Japan Index +1.1%, FTSE ASEAN +0.9%, Thai SET Index +0.8%.
Asian and most international currencies gained ground against the US$, although this provided little respite to commodity prices. The Euro was propelled by ECB President Mario Draghi’s hawkish comments, regarding cutting back on bond purchases. Clearly with US$ 14 trillion in global central bank bond holdings, any hint of an unwind creates headwinds for the high priced developed world stock markets, and risks triggering another “taper tantrum”…
Added to that, the ongoing friction between the media and the elected US President, as well as the allegations of collusion with Russia, may lead to a serious physical political clash between opposing sides, as Trump’s base rises up. Having witnessed the manifestations of polarity manipulations in Thailand over the last decade, we hope civil strife can be avoided.
A correction in highly priced US tech shares is well overdue, and may already have begun, with a likely retracement of -10-20% in the larger names such as Alibaba, Amazon & Facebook. We have increased short positions on Alibaba & Tencent in Hong Kong.
Commodity related shares have continued to disappoint, and we swallowed our pride and scaled back somewhat. All key projections show that oil price shortages will re-emerge in coming years, but for now the price seems locked in a downward trending trading range. Similarly with gold, where supply demand remains favourable, remains in a slightly upward trending trading range, but with no sign of a breakout, unless the trigger comes from US turmoil.
The main event for East Asia this month was Chinese President Xi Jinping’s first official trip to Hong Kong. The well choreographed visit presented few surprises, with Xi’s speech to commemorate the 20 year anniversary of Britain’s handing HK back to China, mixing reassurance with warnings. Reassurance on the “Two Systems” promise, which HK has enjoyed post handover; and warnings against fomenting pro-independence or sovereignty challenges to the “One Country” principle.
It is interesting to note that in 1997 HK’s economy was the equivalent of 19% of China/HK total, but is now just 3%. However, this underrates the continuing importance of HK as a conduit of capital, trade and technology to the mainland. As ever, HK & China are intertwined, exemplified by the July 2nd launch of “Bond Connect”, allowing Hong Kong based investors access to the US$ 9 trillion Chinese bond market.
The new HK Chief Executive, Carrie Lam, must address issues such as the property cartel and other monopolies, if she is to curry favour with the electorate.
The bigger policy issue for many, is how to break the stranglehold of leading HK business groups, with the top 10 controlling more than 50% of the economy. We remain short on HK property shares.
The Thai market was flat this month, holding steady in a tight range. In the absence of short-term negative factors from overseas, we can expect the market to break out on the upside this summer, driven by domestic liquidity and a lack of foreign activity during their summer holidays. Construction and banking stocks may lead the way, on the expectation of infrastructure contracts.
Special situations helped our portfolios this month, particularly Toshiba (where we already took profit), and commodity trader Noble Group (which rose 50% on an agreed 120 day postponement of debt repayments). Noble has fallen 95% from SGD 10 to 0.50 over the last 3 years, and trades at just 30% of what we consider minimum breakup value.