Knight Asia Newsletter December 2024 and New Year Themes for 2025
Asian equity markets fell back in December with South East Asian markets mixed for the full year, and East Asia somewhat higher. The FTSE Vietnam (USD) -9.9%, the Thai SET Index (USD) +2.3% in USD for the year (slightly negative in Thai Baht); MSCI AC ASEAN Index +7.7%, MSCI Asia Ex Japan +9.8%, the Hang Seng Index +17.7%. Knight Mekong Strategy Fund slipped -3.0% and Knight Asia Contrarian Fund -1.6%.
President Elect Donald Trump seems to have started his second term early with policy, cabinet, and key “kitchen cabinet” nominees well flagged. Many are smart and disruptive talents, but all will need to be approved and then constrained by the various Senatorial oversight committees. Most relevant to Asia are the choices of Sen. Marco Rubio as Secretary of State, hedge fund manager Scott Bessent as Treasury Secretary, army officer war veteran and TV host Pete Hegseth as Secretary of Defense, and investment banker Howard Lutnick as Commerce Secretary. Governments around the world are bracing and adjusting for President Trump’s first day deluge of executive orders and policy directives.
The invitation for President Xi Jinping to attend the inauguration will probably be rejected, but an early meeting between the two is likely, ideally leading to a softening of tariff hikes. Much of Trump’s rhetoric will be tempered by his advisers and practicality, but we do expect him to act quickly on global peace deals, lesser trade tariffs vs “currency manipulators”, and anti-drug penalties. Southeast Asia should generally benefit from the tariffs, although Vietnam, which has a massive US$ 100 billion surplus with the US, may not be completely spared. Japan could also get favourable treatment, despite it being arguably the world’s worst currency manipulator. We do not expect the incoming President will waste too much time on personal revenge vs the Bidens or others, except perhaps on those directly involved in raiding his home. However, it is quite likely that Amazon will have to start paying commercial rates to the US Post for last mile deliveries, which would kill its profitability, and at a 50x PE, it looks like the best short in the US market.
Southeast Asian leaders will continue to plot a middle course between economic dependency on China and the USA, whilst also trying to stay non-aligned geopolitically. Asia-centric RCEP should continue to progress, whilst the much broader BRICS grouping may have to be de-emphasized, and the reserve currency initiative mothballed. ASEAN seems to be coming back together, with PM Anwar inviting ex-Thai PM Thaksin to be his adviser when Malaysia takes the Chairmanship of ASEAN next year; and the new Indonesian President Prabowo looking to raise Indonesia’s influence and trade outside its own massive 300 million person market. Myanmar’s ongoing conflict remains a dividing factor in ASEAN, but we are hopeful of a China/Thailand brokered solution with a new “interim” leader emerging from the Than Shwe/Thein Sein pro-China military faction.
In Thailand, Thaksin Shinawatra has seen several court cases go his way in recent weeks with the Constitutional Court rejecting a case asserting that he exerts outside influence on Pheu Thai Party, and another one questioning his eligibility to serve his past jail sentence at the Police General Hospital. The traditional establishment, and the bureaucracy that 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 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 for much of the 2000s almost 30% of the total market cap), no national healthcare scheme, and no long-term tax incentives for savings, and few free trade agreements. All of these are legacies of Thaksin’s brief time in office from 2001-2006.
Many of the themes we identified at the end of 2023 remain valid for 2025, despite some coming partly to fruition already, and some being called too early, such as the demise of the US tech stocks:
1) Risk of market driven rising interest rates as Western governments struggle to fund their deficits. Markets have priced in
a softening of rates, but this may turn out to be wrong with 50% of the US tax revenue taken up by interest payments on existing debt and military spending. The US government will need to borrow over US$4 trillion next year just to cover its US$2 trillion budget deficit and about US$2 trillion in debt rollovers. Who is going to buy this debt? Probably traditional buyers such as China will be reluctant, but may be coerced into it by the Donald in return for lower import tariffs, In fact we expect this to be a core feature of Trump trade policy: “MANDATORY TRADE SURPLUS CONVERSION TO US TREASURIES”.
Foreign surplus money (approximately US$ 1 trillion) will not be enough in itself, and US domestic savers/pension funds and global institutions will also step up, but may need to be enticed by higher yields. This time the Federal Reserve may resist being the buyer of last resort, since another round of QE risks reigniting inflation. Europe is not much better off and the UK is even worse depending on GCC and Commonwealth money to stay afloat. High interest rates may trigger a consumption contraction and recession in most parts of the developed world. This would dampen demand for Asian exports, although Southeast Asia has a strong domestic consumption base, and will continue to benefit from shifts in production capacity away from China.
2) NASDAQ will likely suffer a fall similar in scale as that seen in 2022, as the AI bubble bursts. Stocks like Amazon at 50x PE look particularly vulnerable, especially if President Trump asks the US Post to impose commercial rates on the company’s delivery business. The likes of Tesla look vulnerable too, either on a falling out with his new friend, or a Democrat boycott of his cars (hopefully without blowing up any more cybertrucks). Crypto currencies may lose 50% with leveraged correlation to tech stocks. Asia would also tumble in sympathy, but far less, and then rally strongly as Asian money begins to be repatriated to home markets and the US magnet weakens. As a classic contrarian indicator, Thai banks are encouraging their customers to sell their Thai equity funds and switch to US equity funds, and US tech PE funds. This might have been a great idea two years ago, but we now advise the reverse. The Thai market rarely falls two years in a row (as it has 2023/2024 in baht terms), and never three years in a row.
3) The RCEP trading block will continue to come together with China at its core. RCEP is the world’s largest trading block encompassing 30% of the global economy and over 2.3 billion people. It is especially positive for Southeast Asia as it encourages Chinese investment in infrastructure and manufacturing. The increasing relevance of the BRICS nations grouping, overlaps with RCEP, and may be under pressure from the Trump administration to go slow, especially with regards to the proposed BRICS currency. However, the RCEP countries will seek to forge stronger trade ties, in order to reduce dependency on US exports. A key factor is expected to be the economic recovery in China, as the property sector is assisted in completing presales, and local government debt is monetized by the Central government. Anticipation of government stimulus and rising domestic consumption should spur the Hong Kong & China stock markets to be world leaders in 2025.
4) ASEAN coming together and nominal Myanmar political resolution and election. China is likely to broker a nominal political resolution in Myanmar this year, with a new President being “elected” from within the pro-China camp in the military. Most rebel groups will accept a peace deal in exchange for greater autonomy at the State level, leaving the NUG & PDF out in the cold. Thailand may play a key role with Thaksin serving as adviser to ASEAN Chair Anwar and Indonesian President Prabowo will also support a Myanmar compromise in order to re-unite ASEAN. Singapore risks becoming increasingly isolated amongst ASEAN members, and Philippines more than ever the 51st State of the US (or 52nd !).
5) Thailand’s Pheu Thai government led by PM Paetongtarn Shinawatra will continue to gather foreign and local investment support, especially receiving more investment from China. With former PM Thaksin having been released from “hospital prison” late last year, he will exert increasing behind the scenes influence. Although Thailand’s growth appears sluggish, especially up-country, there doesn’t seem to be any justification for the constant foreign and local portfolio outflows. We expect this to reverse this year. Debt relief, FDI, tourism and a rebound in domestic consumption should drive the Thai economy to achieve a more respectable GDP growth number in 2025-2026. We expect Bangkok to eventually become the preeminent lifestyle choice in Asia, with huge benefit to companies in the service sector. (They first have to fix the air pollution).
6) Climate change & sustainability will continue to be an important theme, but fossil fuels may come back in vogue out of necessity. Given the lack of flexibility in government budgets, combined with a general pushback against imposed electrification and identifying future supplies of essential minerals such as copper we expect a continued de-rating of related stocks as well as so-called ESG labelled counters in general. China has led the world on sustainable power generation in recent years, investing US$ 270 billion in 2022, compared to the EU investing US$ 54 billion and the USA US$ 49 billion. Solar power investment surpassed investment in oil for the first time in 2023, and being 10x what it was in 2013. Despite this, oil and gas prices seem set to rise this year as demand in Asia expands. Fossil fuel producers are “necessary evils” for the time being, and President Trump intends to encourage more US drilling for oil & gas, and share prices should recover accordingly.
7) Asset Allocation for 2024: Investors should adopt a cautious stance, selling high flying tech shares, switching to equity markets in Asia on weakness, especially HK/China and ASEAN/Thailand, and holding cash and short-dated bonds, until markets correct. Gold may also pullback, so we’d look to increase related shares around US$2,200 per oz.
With Best Regards
JEREMY