Knight Asia Newsletter October 2024
Asian equity markets fell back in October led by the Thai SET Index (USD) -2.9% (YTD +8.5%), the MSCI AC ASEAN Index -4.8% (YTD +9.4%), the MSCI Asia Ex Japan -4.5% (YTD +13.5%), the Hang Seng Index -3.9% (YTD +19.2%), and the FTSE Vietnam (USD) -5.2% (YTD -6.4%).
The resounding victory for President Elect Donald Trump and his allies on November 5th caught many commentators and pollsters by surprise, although not the bookmakers who called it correctly. With the Republican Party also winning majorities in both the Senate and House of Representatives, Trump should be able to push through much of his agenda with an aggressive 100 day plan now being is discussed. Most of this agenda such as border security, law & order, deregulation and lower taxes is domestic in nature. It would be too optimistic to think that he’ll be able to push back bureaucratic creep permanently, but he may at least contain it for a while. However, if Trump succeeds in satisfying voters, we could see this government last 12 years, through two additional terms of VP Vance, so it is really important to try to understand the implications.
From a global perspective, Trump believes in peace through strength, meaning he will use the US military to intimidate other countries to follow his plan, but only use it as a last resort. The Ukraine War will likely end quickly with Russia freezing any further advances and US promising to veto Ukraine’s admission to NATO and give back its foreign reserves, (possibly with a sweetener that Ukraine give up the Bidens, although we don’t expect Trump to dwell too much on judicial revenge despite earlier rhetoric). Borders would be drawn similarly to where the military stalemate is now, similar to what happened with the Korean War which to this day remains an armistice with no final peace treaty. The Middle East will be harder to resolve, but escalation vs Iran is unlikely and be mainly focused on Israeli bombing of military targets rather than oil facilities. At home, Trump will liberalize oil drilling in the US, which may further bring down energy prices and help curb inflation. He will also lift Biden’s blocking of natural gas exports to Europe providing additional export income and helping further stabilise Europe’s energy supply. China will be discouraged from retaking Taiwan, but the US will not intervene, other than continuing to sell armaments. Meanwhile there will be a very strong push to re-shore strategic industries within North America.
Trump regards nuclear war to be the most immediate serious threat to the World, so will exercise rapprochement with Russia, but for strategic economic reasons, not allow Europe to do the same. This will put a high risk target on his back with some elements determined to keep Russia as a budget justifying enemy. Friendly nations such as in the EU, UK, Japan, South-East Asia and frenemy China will be treated as freeloaders and have to increase their “tribute” payments to the US through tariffs, armament purchases, and other contributions, but the emphasis will be economic re-balancing rather than security. Given the need to keep inflation (and interest rates) down, we expect tariffs to be only gradually introduced. Overall the US may become more isolated, and stay that way for at least a decade. However, substantial US budget deficits will remain, and with a growing reluctance on the part of foreign central banks to fund it, the treasury will have to tap domestic savings, including from multinationals and wealthy families (who may now shelve plans to flee from the IRS and decide to stay in the US). Initially we could see dollar weakness, but eventually higher interest rates may reverse the trend.
South-East Asian leaders must continue to plot a middle course between economic dependency on China and the USA, whilst also trying to stay non-aligned geopolitically. Philippines made its choice decades ago, but Indonesia, Thailand and Malaysia have all joined BRICS. President Prabowo is visiting both China and the US in his first month in office, seemingly looking to raise Indonesia’s influence and trade outside its own massive 300 million people market. His emergence may yet save ASEAN, and remove the current North/South divide. A peace solution in Myanmar is the key to this. We are hopeful of a China brokered solution in Myanmar, with a new leader emerging from the Than Shwe/Thein Sein pro-China military camp.
Few countries may escape US trade tariffs altogether, although they will start with Mexico and China, and the Trump administration may temporarily exclude South-East Asian countries benefiting from manufacturing shifting from China in the first phase. This may be seen as a welcome weakening of China’s industrial base, even including Vietnam which has a massive US$ 100 billion surplus with the US. Japan may also get favourable treatment, despite it being arguably the world’s worst currency manipulator.
In Thailand, Thaksin Shinawatra has been keeping a low profile, but must be wishing he was a US politician, where Presidents can pardon themselves and elections stand, even if the establishment doesn’t like the result. Thaksin’s enemies are circling, and it remains to be seen which way the “courts” will rule. The Supreme Court rejection of a rice pledging scheme related case against former commerce minister Kittiratt Na-Ranong may be a positive sign. It also clears the way for him to become the future Chairman of the Bank of Thailand. The traditional establishment and the bureaucracy they control will continue to resist the resurrection of the “Thaksin regime”, and re-imposition of “Thaksinomics”; even though much of Thailand’s progress in the last 25 years stems from there. Imagine Thailand trying to either push 40 million tourists through cranky the old Don Muang Airport, or the stock market with no PTT Group listed (resisted at the time, but now 30% of the total market cap), no national healthcare scheme, and no long-term tax incentives for savings, few free trade agreements. All of these are legacies of Thaksin’s brief time in office from 2001-2006.
With Best Regards
JEREMY