Asian Markets bounced back in April as sellers reached cash targets, but remained well down on the year. The Hang Seng Index is -13.0% YTD, MSCI Asia ex Japan Index -12.5% YTD, MSCI AC ASEAN Index -26.6% YTD, the Thai SET Index -24.9% YTD, & FTSE Vietnam -19.9% YTD. Knight Mekong Strategy Fund slipped -0.7% YTD, and the Knight Asia Contrarian Fund +0.4% YTD.
April saw the beginnings of a more balanced debate on the merits of lockdowns and economic damage to people’s livelihoods vs the likelihood of people actually catching COVID in a serious way. Data increasingly shows that 90% of those infected with COVID show no symptoms, and that 90% of the 5% with serious symptoms are those of advanced years or having existing serious illnesses. It was apparent from as early as February who the risk groups were. So why did almost all governments, except Sweden, choose the path of optimum economic destruction, making this essentially a political rather than health crisis ? The answer varies from country to country. No doubt the motivation was to protect people against a perceived health threat, but the effect has been a bureaucratic power grab.
In South-East Asia, the main motivation appears to be political, since the virus never really took hold, presumably due to the hot & humid climate, despite months of unfettered access for Chinese tourists. In Thailand infection rates are 0.0005% or 1 in 20,000, and death rates 1/400 of those from the antibiotic resistant superbug, and cases less than 3% of dengue fever cases. Similarly in Philippines, Malaysia, Indonesia and Singapore. Singapore is touted as having 14,000 “cases”, but with 10X the testing of Thailand, Singapore identifies many asymptomatic cases, and has had just 14 (unfortunate) deaths (or 0.1% fatality).
To put it kindly, governments in ASEAN were keen to show that they care about the health of their subjects, or were responding to the virus of fear generated by the media. Unfortunately poor people in these countries live hand to mouth, and cannot do labouring jobs from home. Protest movements in Hong Kong and Thailand were conveniently curtailed under group gathering restrictions. Asia has a way of “pressing the reset button every 10 years”, you can decide for yourselves whether this is a natural cycle or engineered by the “powers that be”. Certainly the COVID collapse has created opportunities for those with available liquidity, including some of my readers.
In April, the media and investors started to get bored with the COVID hype, and this coincided with apparent cresting of new COVID infections in many countries, media airing of more clinical success of the various treatment protocols, and publicity surrounding over 80+ vaccines are under development The vaccine race is being led by Moderna in the US, Cansino/PLA in China, and Jenner Institute/Oxford Vaccine Centre in cooperation with AstraZeneca. All of whom have been running clinical trials for 1-2 months and expect launch by September. We bought some shares in Cansino (6185 HK).
The global markets reached an equilibrium in the middle of March and have since recovered between 30-50% of their losses. Asia is likely to see a V-Tick shaped recovery in the markets, but a W shaped economy. The US should be similar, but Europe more likely a V/Tick on the markets and U on the economy. Despite disastrous corporate earnings in the 2nd & 3rd quarters, it is hard to see how markets can go down much, faced by enormous amounts of money printing in the West, and near zero interest rates.
China’s PMI maintained itself above 50 in April, after falling inevitably to a low of 38 after February’s two week Chinese New Year / COVID break. The Chinese National Congress will convene on 22nd May in another sign of return to normality. Supply chains have held up fine, the worry now is of a steep decline in European & US demand just as China gears up its production capacity. Initial 1st Quarter GDP numbers in Europe were not that bad, showing just -3.8% contraction, but given only 2 weeks of lockdown in March, 2nd Q will be worse. Overall, a surprising segment of the economy seems to continue even with most people locked in their homes, and government handouts have supported basic consumption. In South-East Asia, regional tourism will certainly bounce back quickly once it becomes possible to fly again, but long-haul intercontinental travel will take longer to recover.
The biggest identifiable geopolitical impact of the COVID shock, is the further segmentation of the World into three blocks: The Americas, Europe/Africa, and China/Japan dominated Asia. This was happening already, and is now certain. The West will isolate China, and China will increase its stake in South-East Asia, in direct competition with Japan, although RCEP includes both of them. China’s growing influence will be very good for The Mekong Region & ASEAN economically. Especially, since exports from China are increasingly being substituted with exports from Vietnam, Thailand & Cambodia. Exports from Thailand actually increased +4% in March.
In terms of the ASEAN stockmarkets, the deep bargains have been gone since mid-March, but valuations are still reasonable if one looks forward to 2021 earnings. Banks are a good place to start, since governments are insulating them from heavy NPLs. Construction companies, industrial parks, convenience stores, healthcare and hotels all look interesting too. However, the economic stress has wiped out the small players, and reinforced the hegemony of the big business groups, who are the ones able to benefit from issuing low priced bonds and bank loans. “If you can’t beat them, join them”. We will be focusing on the leaders.
Gold miners have performed well, and 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. We are accumulating shares in Emerald Resources in Cambodia, which is now fully financed and heading into production next year, with a forward PE of 4X.
Our key strategic investee company in Cambodia, BRM Agri Cambodia filed for listing on the Canadian Securities Exchange at the end of March. BRM’s IPO proceeds will be used to initially double its annual rice paddy milling capacity to at least 40,000 tons resulting in a forward PER of 7-8x. BRM plans a Thai secondary/DR listing at double this price within the following 15-18 months. Rice prices have risen +25% this year, due to droughts in Thailand and Vietnam. Cambodia is blessed by plentiful water from the Tonle Sap Lake. Also in Cambodia, the reopening of casinos is imminent, which should result in substantial upside in Naga and Donaco. 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. The agreement is expected to be signed whenever Myanmar lifts its own “lockdown”. Post lease, GC has prepared plans to list in London or Singapore at a substantial premium to the current valuation. EY is undertaking a new valuation on the company post lease.
Asian Markets were mixed in May after last month’s rebound. The Hang Seng Index fell -6.8% (-18.9% YTD), MSCI Asia ex Japan Index -1.4% (-12.9% YTD), MSCI AC ASEAN Index +1.3% (-23.2% YTD), & the Thai SET Index +5.3% (-20.0% YTD). Knight Mekong Strategy Fund slipped -0.3% (-1.0% YTD), and the Knight Asia Contrarian Fund -0.5% (-0.1% YTD).
Disastrous economic numbers brought about by the ill-fated global lock-downs faced off against enormous monetary stimulus from central banks around the world. Inevitably, money printing won this round as unconditional government bond & stock buying filled the war chests of banks. Negative or near zero interest rates make almost anything attractive to tracking error investors. Although fears of a second lock down this winter may lead to institutions maintaining a defensive stance going forward. In reality, in the post-mortem analysis of the stay-at-home orders, we expect governments to fine-tune any future lock down policies to be targeted on the most vulnerable.
However, as we move into the summer in the northern hemisphere and institutional decision-makers get back to their desks, we expect asset allocation to become more discerning. Despite weakening export data, Southeast Asian economies may bounce back quickly because of strong government and corporate balance sheets; a young, dynamic workforce keen to improve their lives; and lastly as they are beneficiaries of expanding China-US trade friction. Last year, Chinese and other Asian manufacturers bought large amounts of industrial estate land in the Mekong Region to diversify their production bases outside of China and next year they will build on it. Tourism in the ASEAN-Mekong region should also recover as quickly as it is allowed to. Initially this will be intra-regional travel, but within 9-12 months long-haul Europeans should return to their favourite destinations. For those people vulnerable to COVID and other winter illnesses, where better to spend your winters than Thailand with near zero infections and excellent, affordable hospitals ?
North Asia is less certain. It is more vulnerable to worsening trade friction and it is also caught up in the crossfire of US-China geopolitical tension. With the skyrocketing numbers of new unemployed in the US in an election year, President Trump must blame it all on China rather than admitting that the lock-down came either too late or was entirely a mistake. As Hong Kong people fight to retain their autonomy from China in the face of the imposed national security addendum to the basic law, Taiwan is both a beneficiary safe haven, but also a potential pawn. The possible loss of Hong Kong’s special trading status with the US would likely move Hong Kong closer to the day when the HK$/US$ peg may finally be removed. Although valuations are cheap, we would tend to avoid pure Hong Kong shares and favour China H shares with domestic orientation.
In Thailand, the three month breathing space on interest and principal payments granted to SME borrowers will expire at the end of June. The real washout in the economy will come in the 3Q 2020 with literally hundreds of hotels on the market in Phuket and Bangkok. We are already seeing condominium builders cutting prices and Thai Airways is heading for rehabilitation (the Thai version of Chapter 11). Despite roaring liquidity, we can expect some consolidation in the SET around these current levels pending a major change such as re-opening the country to tourism.
Our key strategic investee company in Cambodia, BRM Agri Cambodia filed for listing on the Canadian Securities Exchange at the end of March, and should be trading by July. BRM’s IPO proceeds will be used to initially double its annual rice paddy milling capacity to at least 40,000 tons resulting in a forward PER of 7-8x. Rice prices have risen +25% this year due to droughts in Thailand and Vietnam. Cambodia is blessed by plentiful water from the Tonle Sap Lake. Also in Cambodia, the reopening of casinos is imminent which should result in substantial upside in both Naga and Donaco. 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. The agreement is expected to be signed whenever Myanmar lifts its own “lock down”. Post lease, GC has prepared plans to list in London or Singapore at a substantial premium to the current valuation. EY is undertaking a new valuation on the company post lease.
Asian Markets firmed up in June, with the Hang Seng Index +6.4% (-13.7% YTD), MSCI Asia ex Japan Index +7.9% (-6.1% YTD), MSCI AC ASEAN Index +3.7% (-20.4% YTD), & the Thai SET Index +2.8% (-17.8% YTD). Knight Mekong Strategy Fund gained +0.5% (-1.5% YTD), and the Knight Asia Contrarian Fund +0.3% (-1.5% YTD).
US markets continued to outperform other major markets with NASDAQ +12% being the only major market to be positive on the year to date as of end June. This trend has so far continued in July, but it has now been joined by rallies in the Chinese markets, almost as if these market rallies are part of the US vs China competition for hegemony. We mentioned earlier this year that political reactions to COVID have reinforced the trend towards a tri-polar world, but now this shift appears to be accelerating. Whether it is either political grandstanding or a real perception of threat, US politicians are lining up a myriad of ways to undermine China. To us it is clear that the winner regardless is South-East Asia where Asian and multinational companies are shifting production to avoid being directly caught between two major global powers. With the US presidential election now in sight, it seems unlikely that a change at the top would change US policy towards China, although a Biden White House would likely make more overtures to the “swing countries” in Asia such as Thailand, Vietnam & South Korea.
Hong Kong has been caught in the crossfire where its shares were under pressure ahead of China’s imposition of a Basic Law addendum outlawing sedition & insurrection. Similar laws are not unusual for many Asian countries, but it is also rarely enforced elsewhere. In hindsight, there must be many in HK wishing they hadn’t objected to the far milder extradition bill. Whoever sponsored the violent protests in HK has succeeded in forcing the Chinese government to take action even at the risk of possibly increasing China’s isolation. The US suspended Hong Kong’s special trading status with the US, which should have little material impact on the economy, but this hardly helps the Hong Kong people. More serious is the US recent threat to the US$/HK$ currency board, although in reality the US$ may have more to lose since it may be replaced by the RMB in most of Asia for trade. The HK dollar may ultimately even become a gold pegged reserve currency itself. Meanwhile, the largest Chinese companies listed in the US continue to arrange primary or secondary re-listings in HK (not Shanghai or Singapore), re-enforcing Hong Kong’s status as one of China’s financial capitals.
Many Western technology companies see the Hong Kong insurrection law as a threat to privacy, and will reduce their footprint in Hong Kong. There may be brain drain of smart Hong Kong people and dual passport-holders, but this may then be offset by a continual inflow of the brightest minds in China for whom Hong Kong remains relatively attractive more attractive to live and work in. The UK may also benefit from a partial exodus of BNO passport holders, although the British government will face criticism at home if too many take up Boris’s kind offer of UK residence. At a time when UK needs China’s trading largesse, it is an extraordinary gambit. Maybe the UK hopes that by challenging China, it will become a haven for their offshore money. As the protests die down, and Hong Kong people revert to being apolitical as they were under British rule for over 150 years, the city will remain a strong commercial competitor to Shanghai. Hopefully the Hong Kong government will then address some of the economic & housing issues that enabled the protests to take root. We remain confident of the ultimate resilience of Hong Kong as a service centre for Asia, and as a hub for capital and talent across the region. Over the short-term, Singapore and Taiwan should benefit from capital flows from Hong Kong, but these places would not be good places for protesters to hide over the long-term.
The COVID “pandemic” continues to be used as a pretext for various political agendas in Asia. Only a vaccine will put an end to this. Fortunately Moderna and Astra Zeneca have already began the mass production of vaccines from early July even before the results of the Phase 3 clinical trials are complete and released around end August/early September. This could mean a normalization of travel by the end of this year with a strong recovery for 2021. Currently, there are further delays in opening Thailand to foreign tourists even from COVID-free countries. This is hard to fathom and continues to depress the hotel markets in Phuket and Bangkok. However, it has created a buying opportunity in the sector since Chinese, Japanese & other Asian tourists will flood back when allowed to do so. Flagship Thai Airways moved closer to formally entering rehabilitation (the Thai version of Chapter 11) expected in mid-August. Thai Airways may yet emerge leaner and more ready to compete on service standards with Singapore Airlines and Cathay Pacific if a strong management team is allowed to employ Thailand’s high standards of hospitality going forward.
In Thailand, the banks continued to go easy on SME borrowers, postponing the inevitable NPLs, while the banks also were required by the BOT to cut dividends to zero to prepare for the eventual hit to their earnings. By comparison, the Thai agricultural sector remains strong with CP Group firing on all 3 cylinders (chicken, pork & shrimp). This could be a sell signal since usually at least one leg of their business has challenges. However, CP Food’s retail food position across the Mekong Region gives it a strong base to smooth out historical volatility of earnings. The broader SET Index has retreated from its recent highs, and we would look to buy on weakness ready for next year’s recovery. Notably, the Thai baht has remained strong on both trade surpluses and Mekong region/Chinese inflows. It remains to be seen whether the decision for Thailand to join CRS will put pressure on the Thai baht next year. Possibly the Philippine peso & Myanmar Kyat will be beneficiaries.
Precious metals are key beneficiaries of the post COVID stimulus measures, and if the tripling of gold from $600 in 2008 to $1800 in 2011 is anything to go by, the YTD move from $1500 to $1800 is just a warm up. The scale of monetary stimulus this time may be even higher. Within our region, we favour Kingsgate in Thailand, Emerald Resources in Cambodia, and Newcrest in New Guinea/Australia.
Our key strategic investee company in Cambodia, BRM Agri Cambodia has filed for listing on the Canadian Securities Exchange and should be trading by August. BRM’s IPO proceeds will be used to initially double its annual rice paddy milling capacity to at least 40,000 tons resulting in trading a forward PER of 7-8x. Rice prices have risen +25% this year due to droughts in Thailand and Vietnam. Cambodia is blessed by plentiful water from the Tonle Sap Lake. Also in Cambodia, the imminent re-opening of casinos should result in substantial upside in both Naga and Donaco.
Sources: Bloomberg LP, Siam Knight Fund Management