Asian Markets rose in October, with the Hang Seng Index +2.5%, MSCI Asia ex Japan Index +4.7%, MSCI AC ASEAN +2.0%, Thai SET Index +3.1%. The Mekong Fund +2.6%.
Global money flows quietened down in October as technology shares found new momentum on the back of good results from Amazon, INTEL and others. NASDAQ rose +3% hitting an another all-time high. Apart from the ongoing Russia-gate accusations, the market has been dominated by the long-awaited Republican tax reform package, and the proposed appointment of the new Governor of the Federal Reserve Board, when Janet Yellen’s term expires in February next year. Existing Fed Governor (since 2012) Jerome Powell has now been nominated, and is likely to be confirmed by the Senate committee. With an investment banking background, Mr Powell is the first non-economist to be appointed Chairman in decades, but most pundits believe he will follow similar interest rate policies as Yellen. However, faced by any new crises, he may show a bit more imagination that past governors.
The Hong Kong and Chinese markets consolidated ahead of the Chinese Communist Party Congress. As expected, Xi Jinping secured his second 5 year term, and surrounded himself with allies in the new politburo. With President Xi now incorporated into the Chinese constitution, with Article 2 listing a new guiding principle: “Xi Jinping’s Thought on Socialism with Chinese Characteristics for a New Era”. The “New Era” clearly includes greater Chinese state engagement with the World, such as the “One Belt, One Road” infrastructure initiative. It also seems to emphasize the rule of law within China, and maintains a commitment to market forces within China. Xi has set a seemingly modest target for China to be classified as a rich nation by 2050. Only time will tell what else Xi has in mind, to fulfil the “Chinese Dream”.
Meanwhile, President Trump has embarked on his 12 day Asian tour, dominated more by the US North Korea worries than the rebalancing of trade that was once Trump’s priority. Sadly for Trump he is now cornered into doing one of the worst possible deals: sacrificing trade in return for China’s cooperation in controlling a small wayward nation. We are not suggesting President Xi planned it this way, but he certainly has luck on his side.
The Thai market was subdued last month, ahead of the funeral of the much loved King Bhumibol Adulyadej on October 26th. The funeral itself was meticulously planned and went off without a hitch, heralding a unity amongst Thais missing during the past 10 years of political strife. Attention will now shift to the upcoming coronation ceremony of already King Vajiralongkorn Bodindradebayavarangkun.
We can then expect to see political activities increase in ahead of elections next year. With the Shinawatra clan at least temporarily neutralized, and the revocation of former PM Yingluck’s Thai passports almost guaranteeing she receives asylum in Britain, a fractious coalition is the likely result. Economically, the Thai economy is chugging along at a modest pace of about +3.8% for 2017, although the national figure obscures the rapid growth in Bangkok, the Eastern Seaboard and Mekong border areas. Commodity dependent South & North-East are lagging; although Thailand retains its #2 position as global rice exporter, with 10m tons targeted for 2017 (0.3m behind India). Amongst other bright spots, exports are forecast to hit an all-time high of US$ 232 billion this year (+8% over 2016), and tourist arrivals are expected to hit a new high of 34 million (with Bangkok to retaining its #1 position as “Most Visited City” ahead of London). The Thai stockmarket remains reasonably valued, especially in the banking, energy, property and agribusiness sectors, and should continue to perform well next year.
In Myanmar the military and government is feeling the pressure from international agencies over the disastrous situation in Rakhine state, although we expect this to begin to calm down in both the media and on the ground. State Councillor, Aung San Suu Kyi, finally made a visit to Rakhine State last week (together with our Max Cement partner U Zaw Zaw, who is involved in upgrading infrastructure there). With the NLD government coming under heavy criticism. economic policies may now be given a higher priority, and we expect the new Companies Act to be passed in the current Parliamentary session, allowing the stock market and OTC markets to invite foreign participation. Banks are under huge pressure to recognize NPLs and recapitalize, which we expect will soon lead to a rash of foreign tie ups, and/or government intervention.
In Cambodia, we last week visited our strategic investee company BRM Agro. With 1704 hectares of rice plantation, the priority is now to expand the warehousing, and install a modern drying facility. Next BRM will acquire or build a medium sized existing rice mill, then look to a Singapore or Thai IPO to fund a major mill expansion. With annual exports of 1 million tons, Cambodia now ranks 7th in the World rice export table (one notch behind Myanmar with 1.5 million, and in Vietnam 3rd place at 5.3 million).
In the resource sector we remain positive on oil shares, as Saudi Arabia needs to engineer a buoyant oil price ahead of the ARAMCO listing, and to maintain government popularity during the “Purge”.
In the gold sector, we have added to our holding in Kingsgate, which looks to be the beneficiary of a US$ 100-200 million political risk insurance claim, arising from the Thai government’s suspension of its Akara mine operations under Section 44 (rather than any environmental law). With the suspension now lifted, Akara/Kingsgate should be able to get back to making profits of US$ 30-50 million per annum, putting it on a PE of 2-3X 2018 earnings. But first it has to obtain a bank line or carry out a recapitalization to restart operations. Having commenced arbitration vs the Thai government under the Thai/Australian Free Trade Agreement, it is likely to be boycotted by domestic banks, and must either seek a compromise (such as tax holiday), or raise new equity overseas. We are optimistic that this will be achieved.