Asian Markets took a tumble in January due to a regional worries about the impact of Wuhan flu over Chinese New Year: the Hang Seng Index fell -7.1%, the MSCI Asia ex Japan Index -4.1%, the MSCI AC ASEAN Index -3.8%, Thai SET Index -7.9%, FTSE Vietnam -4.4%, Knight Mekong Strategy Fund -0.2%, and the Knight Asia Contrarian Fund -0.1%.
As we enter The Year of the “Golden” Rat, investors are nervous, although the “Golden” character portends well for a better 2020. Many will remember that the last two Rat years were disastrous (2008 Global Financial Crisis, 1996 Asian Financial Crisis), the Gold may make the difference this time!
The panic verging on mass hysteria surrounding the Wuhan flu, which allegedly arose from people eating bats, initially struck me as bizarre. Without wanting to appear un-sympathetic to the victims, for which it is tragic, I do believe we need to put the outbreak into perspective. Normal flu kills 400,000 people globally every year, 13,000 died in France this winter alone, 150,000 died of Swine Flu in 2009 (with 1 billion infections). Dengue infected 136,000 people in Thailand last year and was barely mentioned. An estimated 150,000 people die of TB in China each year. Yet none of these mobilized the response we have had to Wuflu, which has so far claimed 300 lives, but initially appears to be more lethal than normal flu based on confirmed [under-estimated] cases…
Whatever the source of the virus (which many suspect to be man-made), the Chinese Government, eager to show off their organizational and control skills, mobilized all elements of the government apparatus and made open disclosure to the World, and probably intended to announce a heroic victory over the killer “bat flu”. Similarly, the Hong Kong government has been keen to show due concern for their subjects after fighting with large groups of them for the last 6 months: although now with HK activists calling for border closure, Carrie Lam is facing a difficult balancing. Whatever the motivation of the Chinese government or its enemies to showcase this problem, it has now developed a momentum of its own, with international media attention and travel restrictions. The velocity of the media frenzy smacks of a conspiracy to isolate China. Possibly the panic will die down when the US or Australia release a vaccine in a few months’ time, or it dies out naturally in the summer heat, but the reaction to the virus has likely already driven China and HK deeper into recession.
Prior to this, a great many investors were expressing caution about the high priced US market, but few are quite ready to exit the train, Wuflu may now provide the excuse to take profits. Unfortunately, because of the flu hype, investors are unlikely to redeploy to Emerging Asia stocks, but they should, because the reality is that ASEAN & especially Thai stocks offer extremely good value. Global trade tensions remain an ongoing uncertainty, but after Trump’s mid-January China “trade deal” (or more like guidance MOU), he will likely focus on his country’s trade deficits with Europe, giving Asia some respite. Although the US, despite a grand show of sympathy, may now use Wuflu as stealth protectionism to restrict Chinese goods as well, starting with food products and Chinese visitors.
In Hong Kong, any restriction on Chinese travelers, already reduced in number due to the street protests, will have very negative impact on the economy. Politically, Xi Jinping has made conciliatory statements about not tightening China’s grip in Hong Kong. Hong Kong protests will likely continue but with less potency, and if China wants to restore confidence, maybe discussions will begin about the 2047 extension of the “One Country, Two Systems” system. We will still look to buy HK shares on further weakness around 25,000 on the Hang Seng Index.
Thailand, Vietnam, Cambodia & Myanmar will continue to benefit from manufacturing FDI seeking to diversify away from China to hedge their risk. Chinese companies seem to favour Thailand, whilst Japanese, Korean & Taiwanese industrialists, already well represented in Thailand, are expanding into Vietnam. Having reserved large rafts of land last year, we expect Chinese FDI into Thailand to crystallize in 2020 giving a boost to the lackluster GDP growth. China will continue to expand its influence in Asia, pushing forward its “Belt & Road” theme and ongoing sponsorship of Cambodia & Myanmar.
Long delayed Thai infrastructure projects may also come to fruition this year together with other stimulus measures that may support the overly depressed banking, construction and property sectors. Politically, the threatened dissolution of the Future Forward Party, did not materialize on the 21st January “illuminati Case” ! But may yet happen under the myriad of other pending cases, in which case FF will step up street protests, and transfer members to a back-up party. This will put ever more pressure on the government to perform economically.
President Xi Jinping’s visit to Myanmar on 17th January 2020 was intended to show support to the Myanmar government, in the face of ICJ & UN scrutiny of the Rohingya problem, and focused on the Mandalay-Kyaukpyu corridor infrastructure projects. This comes at a welcome time, whilst many Myanmar banks are losing patience with their bad borrowers and beginning legal action against them. We expect many banks will choose foreign strategic partners this year. AYA bank is reputed to have finalized a deal with a major Japanese bank; Ayerwaddy Farmers Bank has tied up with Kasikorn Bank from Thailand; Yoma Bank has sold 30% to Singapore GIC and Norfund.
Outside of trading the volatility and value bottom fishing, key themes/sectors include Chinese sponsored infrastructure; ASEAN agribusiness & tourism; energy independence; the recovery of the real estate sectors in Hong Kong, Singapore & Bangkok; increased Mekong integration; and industrial park developments outside of China.
Our various special situations are expected to reap substantial rewards this year. Kingsgate’s (KCN.AU) arbitration hearing with the Thai government begins on 3 February 2020 and we believe compromise negotiations will accelerate as the proceedings continue. We still expect that the Thai side will offer indirect compensation for the mine suspension, rather than hard cash. This might include soft loans to restart operations, an extended mine life (currently ends in 2028), and an extended tax holiday. KCN’s market cap is already underpinned by cash from the political risk insurance payout in 1H19, and it also still retains its Chilean silver property and the Australian Challenger deep gold mine. The company has had its 50% share buyback approved by shareholders further underpinning the share price.
Meanwhile, Donaco’s boardroom battle seems to be ending. The Lim family representatives have departed and the new Hong Kong shareholder has taken control. We can’t say which side is better, but certainly a divided board was counter-productive. It is likely that the new board will re-engage with their previous Cambodian/Thai partner to settle the lease and no-compete issues. At 1/10 its previous price level the upside for Donaco’s share price is substantial.
Also in Cambodia, BRM Agro is progressing with its planned 1Q2020 listing on the Canadian Stock Exchange. BRM’s IPO proceeds will be used to triple its mill capacity to 90,000 tons per annum resulting in a forward PER of 5X. After a re-rating to 10X, BRM plans a Thai secondary/DR listing within the following 12-18 months.
Gold Cement, based in Mandalay, is soon to increase its stake in the Sinminn cement plant from being a 49% JV to be a wholly owned 45 year leasehold. Post lease, GC has prepared plans to list in either Thailand, Singapore or the UK at a substantial premium to the current valuation. EY is undertaking a new valuation on the company post lease.
Asian Markets weakened further in February as the Wuhan flu (COVID-19) continued to spread: the Hang Seng Index fell a modest -0.7% (-7.7% YTD), the MSCI Asia ex Japan Index -1.3% (-5.4% YTD), the MSCI AC ASEAN Index -6.4% (-11.2% YTD), Thai SET Index -12.5% (-19.4% YTD), FTSE Vietnam -5.8% (-9.9 % YTD), Knight Mekong Strategy Fund -1.1% (-1.6% YTD), and the Knight Asia Contrarian Fund -0.2% (-0.6% YTD).
The media frenzy surrounding COVID-19 has followed the viruses’ spread to South Korea and Japan, and knocked -9.6% and -6.2% respectively off of their equity markets. US and European markets also tumbled (Dow -12% and Euro STOXX -8.5%). In the US case, this was due to worries about impact on the global supply chain after a series of profit warnings from companies such as Apple, whilst gold soared then fell on dashed hopes of aggressive QE from the Fed. In fact, companies would have stocked up on inventory ahead of the scheduled Chinese New Year so short-term supply chain worries may be overblown. A more genuine worry might be the prospect of tax increases under a Bernie Sanders government, but lets not get ahead of ourselves. The Democrats would probably prefer to lose with Joe Biden than risk losing both the White House and the House given Bernie’s position on the extreme left wing of the party.
In Europe, the sudden outbreak of COVID-19 in Northern Italy caught markets off guard and the fact that the respiratory illness cropped up first in the most polluted part of Western Europe is probably no coincidence. Cases then started to appear in communities in France, Spain, UK, Nigeria & the USA often with no apparent direct linkage with China or other Asian outbreaks.
The fact that the virus causing COVID-19 is becoming widespread without triggering more widespread illness in its path implies that many people are relatively unaffected. The media obsession of the spread rather than its actual severity may soon change, and a lot of embarrassed politicians will desperately switch their focus to repairing the massive economic damage done by the “Media Flu”.
Once the WHO declares a pandemic, as they did with Swine Flu (H1N1) in 2009, the containment effort will subside and emphasis will be on slowing down the internal spread until summer. During summer, it is highly likely that some kind of vaccine may be released with the Chinese already testing one from Oxford University on mice in Zhejiang, with human trials to follow soon. Patients in China are also being given plasma from recovered patents as a serum. The media is switching from using the illness as a way to isolate China, to attacking the US government for not taking it seriously enough. Generally, the US and European response seems proportionate to the threat with the US Surgeon General asking people to stop buying face masks since they don’t work, and the needless demand is creating a shortage for the hospitals and health care workers who actually need them.
So far the Year of the Rat has been true to form (1996 & 2008) although at least in terms of markets, Hong Kong and China have proven relatively resilient thus far. Once the virus is truly under control, China will embark on massive QE and other economic stimulus to support its banks and SMEs. China will also remember who their friends were during this difficult time. Australia and the USA will likely be penalized for closing off flights early and for isolationist media reporting. Japan and Thailand on the other hand may be favoured, and China’s “Asian Pivot” will continue. If the UK’s vaccine works, we’ll get our free trade treaty.
The Hong Kong government has already started with some token stimulus measures, handing out US$1,250 to every Hong Kong citizen and permanent resident. Although any goodwill they generated may be offset by last week’s arrest of suspected financiers and instigators of the protests, including Apple Daily owner Jimmy Lai. The temporary lull in Hong Kong protests is over, and with a new excuse to wear face masks people may become more emboldened once again.
Cases of the coronavirus in South-East Asia remain extremely rare, probably due to the hot humid weather. Despite the continued use of finger-print machines at Bangkok Airport, there has only been a handful of cases of human to human infection in Thailand, all other cases were fly ins. The Thai healthcare system is also rated #6 in the World for pandemic preparedness, the only country in Asia ranked in the top 10 by John Hopkins University. Unfortunately, this has not stopped tourist arrivals collapsing -74% in February, and the stockmarket -20% YTD. European tourists are also staying home even though Influenza A (H3N2) remains the greater threat in their own countries.
With 400 million Chinese locked in their homes dreaming about a beach vacation, there is no question that Thai tourism will recover dramatically in the 2nd half of the year. We hope that Thai hotels have taken this opportunity to refurbish, and re-train (rather than re-trench) their staff.
The supply chain panic will reinforce the shift in manufacturing capacity from China to Thailand and the Mekong Region. Having reserved large rafts of land last year, we expect Chinese FDI into Thailand to crystallize in 2020 giving a boost to the lackluster GDP growth. China will continue to expand its influence in Asia, pushing forward its “Belt & Road” plan and ongoing sponsorship of Cambodia & Myanmar. Vietnam has been similarly hit in terms of tourism and its own stock market, but it will also be a beneficiary in the medium term. Now is an excellent time to increase investment in both Thailand and Vietnam.
Politically in Thailand, the Future Forward Party was dissolved for receiving loans from its founder, whilst similar cases against other political parties have not yet been pursued. Future Forward has morphed into “Future Forward Movement”, with students mobilizing on campuses and wearing face masks to avoid facial recognition. Although the Movement may become more widespread, in past years politics has had little impact on the markets. Additionally, this will put ever more pressure on the government to perform economically, and some kind of power reshuffle is likely. The Thai government’s long delayed infrastructure projects may come to fruition this year together with other stimulus measures to support the overly depressed banking, construction and property sectors.
Cambodia has so far stayed clear of the Coronavirus outbreak, although it earned kudos for allowing a stranded cruise ship to dock. Inexplicably, Cambodia, Laos and Myanmar were added to a very short list of high virus risk countries by the UK !
NAGA Hotels and Casinos has dropped to an attractive level, despite having only 40% Chinese customers (60% ASEAN). Cambodia’s largest bank, ACLEDA, is also going ahead with a partial IPO on the CSX although seemingly without having solved the lack of share custody issue for foreign institutional investors.
Our key investee company there, BRM Agro is progressing with its planned listing on the Canadian Securities Exchange. BRM’s IPO proceeds will be used to initially double its annual rice milling capacity to at least 40,000 tons resulting in a forward PER of 7-8x. BRM plans a Thai secondary/DR listing within the following 12-18 months.
Gold Cement, based in Mandalay, is soon to increase its stake in the Sinminn cement plant from being a 49% JV to be a wholly owned 45 year leasehold. Post lease, GC has prepared plans to list in Singapore at a substantial premium to the current valuation. EY is undertaking a new valuation on the company post lease.
Asian Markets fell further in March as COVID-19 and its associated panic continued to spread. The Hang Seng Index fell -9.7% (-16.7% YTD), the MSCI Asia ex Japan Index -12.2% (-18.9% YTD), the MSCI AC ASEAN Index -19.8% (-31% YTD), Thai SET Index -19.1% (-34.8% YTD), FTSE Vietnam -23.1% (-30.8% YTD), Knight Mekong Strategy Fund -1.3% (-2.6% YTD), and the Knight Asia Contrarian Fund -1.2% (-2.0% YTD).
Without debating the merits of the various government and human responses to the COVID outbreak, the only valid questions should be: when will they end; and what longer-term impacts will be felt from this public health crisis?
On the first question, huge progress has been made on the treatment protocols for the <5% serious cases through a combination of anti-inflammatory / antivirals / antibiotics, but these treatments are not enough to calm fears. The much more important indicator would be a leveling off of the number of new confirmed cases (already seen in China, Korea, and Italy) combined with widespread immunity testing which would enable large numbers of people to go back to living and working their normal lives. Ultimately, only an effective vaccine can put an end to this. Over 40 vaccines are under development, led by Moderna in the US and Cansino in China, both of whom have been running clinical trials for a month. We bought shares in Cansino (6185 HK), which is working with the PLA laboratory in Wuhan. Bill Gates says six months until we have a vaccine, it will probably be less.
Markets meanwhile seem to have reached an equilibrium with a classic 1/3 rebound followed by base-building. It remains to be seen if this will be a V shaped recovery or a U shaped recovery. Given the likely four month wait for a vaccine, and government unwillingness to relax the “Coronopticon”, a U shaped recovery seems more likely. The COVID outbreak has given the excuse for multiple agendas, including isolating China, stopping protests in Hong Kong & Thailand, stemming the flow of refugees in Europe, and the push to block Trump’s re-election in the US. However, we don’t see a permanent change in society and urban living resulting from the COVID hysteria. Although it has certainly reinforced online shopping, entertainment streaming and social media, in the end humans are social beings and most will go back to their previous lifestyles when this is over. Maybe they’ll even appreciate it more.
China’s PMI bounced back above 50 in March, after falling inevitably to a low of 38 after February’s two week Chinese New Year / COVID break. Supply chain worries have proven to be overstated. The worry now is of a steep decline in European & US demand just as China gears up its production capacity. Given the scale of Central Bank interventions across the globe, a deep recession may be averted. Tourism will certainly bounce back quickly once it becomes possible to fly again, but long-haul intercontinental travel will take longer to recover. Airlines as usual have turned out to be a hopeless investment.
Looking through the wreckage of the Asian stock markets, almost everything looks like a buy for those who can see over the end of their face-mask. Now is not a time to be too clever. Best to stick to mainstream themes and companies with strong balance sheets and likely sustainable dividends who may end up increasing their market share with wider margins as weaker competitors either struggle or fail. Companies doing share buybacks are also preferred. In Thailand & Vietnam, we like banks, housing developers, industrial parks and convenience stores. For the tourism turnaround, airport operators & hotels are now at sharp discounts to their February 2020 levels. In Hong Kong/China and Singapore, there are also many bargains including banks, office properties, utilities, and telecom.
Commodity plays are also interesting. The big oil price drop has given the world an enormous shot in the arm with lower inflation, but it is unlikely Saudi & Russia will let it stay down for long. How important is it for them to crush US shale oil production? Energy stocks look interesting, but have an extra variable. Base metal & cement producers may bounce back on the back of huge infrastructure programs as well as supply interruptions from mine suspensions. Gold miners should be clear winners from the new QE explosion. In 2008-2011 the gold price tripled, it will probably at least double this time as investors seek refuge in an asset that should survive increased currency printing.
Sources: Bloomberg, Siam Knight Fund Management