Knight Asia Newsletter September 2024

Asian equity markets were stronger in September, although index gains were massively augmented by currency appreciation vs the weak US$: led by the Thai SET Index (USD) up +12.3% (YTD +11.7%) the MSCI AC ASEAN Index +6.1% (YTD +14.9%), the MSCI Asia Ex Japan +8.2% (YTD +18.8%),  the Hang Seng Index +17.5% (YTD +24.0%), and the FTSE Vietnam (USD) +1.3% (YTD -1.3%).

As we approach the November 5th US Presidential and Congressional Elections, it seems superfluous to make any comment of my own. The market is holding up well, perhaps discounting a pro-business Trump win. This leaves room for a major adjustment if Kamala Harris prevails, and carries out her intended tax hikes and deficit spending. We should also be prepared for civil unrest from losing candidate supporters, and possible secessionist moves over time.

Unfortunately, both sides are anti-China, and both intend to increase military spending for “defense”, despite the yawning federal budget deficit, likely to be US$ 1.8 trillion this year, including $ 800 billion military spending, and $1 trillion in interest cost. They assume US dollar supremacy as an entitlement for being the largest economy and the global policeman. However, on a PPP basis China’s economy is far larger, and the policing role has mixed reviews. Every year, de-dollarization slowly continues, with many commodity transactions already priced in other currencies through alternative settlement systems, and Central Banks are diversifying their bond and currency reserves. It may not be long before the US must tap domestic savings at market driven interest rates, before then caving in to have a massive new QE and consequent inflation. Fortunately major US companies earn over half their revenue and profit overseas.

China unveiled large monetary and fiscal stimulus last month, triggering a short-covering and asset allocation driven rally in Mainland and Hong Kong markets. Sceptics abound, but the consensus is that the property crisis is at least partially addressed, with presales likely to be eventually completed. Local government debt is the much bigger (US$ 7 trillion) problem, and although securitization has started, it will take many years to work through. Growth and consumption is likely to recover in the big cities first, with the provinces returning to their traditional malaise. However the details are dealt with, China is certainly near a cyclical low, and should be bought on any weakness.

In Thailand, Thaksin Shinawatra continues to consolidate his position, although his enemies are circling. Least of these is Pracharat Party and its allies whose challenges are likely to fizzle out soon, and counter-actions succeed. The bigger obstructive force might be the traditional establishment and the bureaucracy they control. It is interesting that the Bank of Thailand cooperated in a rather token 0.25% interest rate cut, which in fact only helps the banks and large corporate borrowers. Pheu Thai has proposed former PM Yingluck’s commerce minister Kittiratt Na-Ranong as Central Bank Governor, which is a bold attempt to rock the boat, but is unlikely to actually happen. A recent reconciliation meeting between old frenemies Newin & Thaksin, will likely shore up the Pheu Thai-Bhumjaithai alliance.

Meanwhile the Thai stockmarket and currency have been strong, reflecting optimism that the current government will last long enough to kickstart the sagging Thai economy. We share this optimism, and see Thailand as one of the best value markets in the region…

With Best Regards

JEREMY