Asia continued to rally in August on the back of post Brexit central bank stimulus with the Hang Seng China Enterprises Index up +6.5%, Hang Seng Index +5.0%, MSCI Asia ex Japan Index +3.1%, FTSE ASEAN +0.6%, and Thai SET Index +2.1%.  Mekong Fund +2.2%.

The post Brexit rally continued through the summer holidays with no real break. With both the BOE and ECB buying up bonds, they are starving UK and European pension funds of yield forcing them to look elsewhere, especially in emerging markets. In effect this is setting up a time bomb of underfunded pension schemes for the future. Also in August, Asian money flows rotated into East Asia rather than ASEAN finally bringing the Hong Kong market into positive territory for the year to date.

In Thailand, the political wrangling continues, as to the drafting of “organic” laws to reflect the result of the recently completed constitutional referendum. With the Senate now empowered to vote on Prime Ministerial candidates nominated by the political parties, in a joint sitting of the two houses some have sought to imply that the Senate should also be allowed to nominate its own unelected candidate. If political strife is to be avoided this event is unlikely to happen.

Post the constitutional referendum, the Thai stock market shrugged off any concerns on the back of ample local liquidity and foreign flows: focusing instead on hopes for large infrastructure contracts and greater regional Mekong trade. The market valuation is at the high end of its range, but supported by a likely recovery in banking and energy sector earnings next year; we are waiting to buy on weakness.

The Thai residential property market remains nominally buoyant, although with growing domestic saturation and weakening affordability, developers concentrating on luring buyers from  Hong Kong, Singapore and Taiwan. A two tier market has developed, with Grade B CBD residential condos selling at US$ 4-5,000 per sqm, but Grade A projects such as the new Sansiri project on Wireless road (allegedly) selling at US$ 20,000 per sqm and the Mandarin Oriental Residences on the River at US$ 15,000 per sqm. Enticed by rising land prices, the British Embassy has appointed CBRE to find a buyer for its 10 acre site on Wireless Road/Ploenchit looking for around US$ 50 million per acre.

The “21st Century Panglong Peace Conference” has started in Myanmar with Aung San Suu Kyi looking to forge a legacy of completing the work her Father started nearly 70 years ago ( before he was assassinated when she was just 5 years old). All 100 ethnic groups have joined the meeting and the process may last for a decade or more. Peace and reconciliation remains a core target for the NLD, but needs to accompanied by sustained and broad economic growth as a second track. Daw Suu’s recent trip to China demonstrates that she is aware of the need for economic and geopolitical engagement with Myanmar’s northern neighbor; lets see if her upcoming trip to the US will lead to the removal of the extensive remaining US sanctions and open the floodgates to greater foreign investment.

Singapore has faced a barrage of publicity relating to the (still rare at 150 cases)  of the Zika virus. The city state has declared war on mosquitoes, and is doing well in their containment. A perhaps less known fact is that Zika has been  in Thailand for 5 years already with barely a mention. Dengue is a far bigger problem, although without the scary birth defects. It remains to be seen whether Zika publicity will begin to deter tourists in 2017.

Meanwhile in the Philippines, the “Punisher” has ratcheted up his war on drugs, with widespread support. Over 2,000 suspected drug dealers have been killed, many of whom comprised of lower level dealers. Senior members of the police have simply been asked to resign. It will be interesting to see if President Duterte plans to restrict high potency alcohol such as Emperor “brandy” or San Miguel gin, which probably affect more people than drugs.

I suspect that the opposition party may use the drug crackdown to impeach President Duterte in a year or so, if his popularity begins to wane on lack of economic progress. Vice President Leni Robredo would step into his shoes, in a repeat of the “palace coup” against Estrada 15 years ago. Senator Leila De Lima has already started the lawsuits, albeit with questionable motives.

The last few months of the year should see the global stock markets locked in a trading range with valuations riding high, and caution ahead of the US election and potential federal funds rate hike. Although we expect the election will mean no interest rate rise this year. In this regard, we are positioned defensively, with emphasis on strategic investments such as preparing Max Myanmar cement for listing, and expanding the rice land acreage at BRM Agro. We are also adding to special trading situations such as Mitsubishi Motors, and Premier Investments (Smiggles), both enjoying strong growth in ASEAN, We are also adding to EDL Hydropower in Laos, Phnom Penh Water, and Phnom Penh Port, all of which are on low single digit PEs.

Ahead of the OPEC unofficial meeting later this month, oil should continue to trade in its $45-50 range, before possibly breaking out on the upside if Russia and Saudi reach an understanding on production limits. We plan to add to oil shares such as Petrochina, Santos and PTTEP on weakness. Meanwhile, Gold has consolidated back to $1300 giving a re-entry point for gold shares, where we are adding to Newcrest and Zijin.