Knight Asia Newsletter August 2024
Asian equity markets were stronger in August, although index gains were massively augmented by currency appreciation vs the weak US$: led by the Thai SET Index (USD) up +7.4% (YTD -3.3%) the MSCI AC ASEAN Index +7.1% (YTD +8.3%), the MSCI Asia Ex Japan +1.8% (YTD +9.8%), Hang Seng Index +4.0% (YTD +5.5%), and the FTSE Vietnam (USD) +6.1% (YTD -2.6%). Our Knight Mekong Strategy Fund was up +0.5% (YTD -0.4%) and the Knight Asia Contrarian Fund +0.4% (YTD +0.6%).
As we approach the November 2nd US Presidential and Congressional Elections, Donald Trump and Kamala Harris’ policy positions are coming under ever greater scrutiny, although Congress has a bigger role in domestic issues. Harris’ policies don’t seem particularly good for the economy: increased corporate taxes, expanded bureaucracy/deficit spending, price controls to control inflation (arguably caused by her administration’s COVID lockdowns); compared to Trump’s emphasis on government reform, law & order, controlled immigration, world peace, economic expansion and infrastructure. At this point the election is “too close to call”. Elon Musk is tentatively to be appointed as Chairman of a new oversight commission on the entire government, this may be entertaining but is unlikely to have the depth to make a real dent in the federal machine, rather he risks going the way of Rudi Giuliani, and Tesla being de-rated to 10X PE.
Both candidates will support ongoing economic hostility towards China, with Trump certainly more aggressive on this criteria. It is unclear whether he favours a weak US dollar: on the one hand he threatens to penalize countries that move away from using the US$ as a reserve currency, or transact commodities in alternative currencies; and at the same time he brands any countries storing up US$ trade surpluses as currency manipulators. In theory, countries with trade surpluses should convert the surplus back to their own currency, triggering a corresponding increase in their exchange rate, that is how an “exchange rate” is supposed to function.
However, these surpluses are currently largely reinvested in US government bonds to fund massive US federal deficits. If these dollars are exchanged to domestic currencies, the US budget deficit would need to be funded domestically or by the Federal reserve (again), thereby creating another bout of inflation. Trump cannot have his cake and eat it too; attacking “currency manipulators” inevitably leads to a weakening US$ and US government funding crisis/inflation. Regardless of Trump’s position (or Harris’ if she has one), the World is gradually diversifying away from US$ dependency. Trade with the US will still be in US dollars, but commodity trade and intra-Asian trade less and less. BRICS will not only transact in bilateral currencies, but also increasingly settle outside the SWIFT system, with alternatives such as China’s CIPS or other fintech.
Meanwhile, China played host to the 9th the China Africa Summit or “Forum on China-Africa Cooperation” (FOCAC) on 4-6 September, with 53/54 African nations participating. In the past 15 years 2006-2021 China has invested/lent US$ 155 billion to African countries and has promised US$51 billion more in the coming 3 years, mostly for infrastructure development. This well exceeds that of the World Bank (the preferred route for US & European governments), and it is the largest single country partner in Africa by a massive margin. Trade is also booming, although Africa only accounts for 5% of China’s total trade, 25% of African exports (mostly minerals, fuels & metals) are destined for China, and 16% of its imports come from China. Africa’s trade with China has surpassed its trade with the US since 2009.
In Thailand, after completing his truncated ‘prison term’, Thaksin Shinawatra outlined his 14 key ideas for reshaping Thailand during the “Vision for Thailand” event organised by Nation Group (Bangkok Post – Thaksin”s vision to reshape Thailand). Many of these also featured in PM Paetongtarn’s policy statement on 12th September:
1) Household debt restructuring and haircut;
2) Legalising the underground economy;
3) Industrial restructuring: By reducing electricity costs and promoting green energy;
4) Tourism Related Entertainment complexes, including Casinos; Land sales to foreigners allowing 99 year leases;
5) 20 Baht electric train fare, covered by car usage charges;
6) Agricultural reform: Utilising R&D to add value to agricultural products;
7) Land Reclamation: To create new green cities, tourist attractions, and flood protection for Bangkok;
8) Negotiating maritime overlapping area: Expediting negotiations with Cambodia to jointly utilise fossil energy in the sea;
9) Financial hub: Transforming Thailand into a financial hub to attract global banks to establish operations here for international transactions, (unfortunately unlikely to happen unless Thailand equalizes its tax regime with HK/Singapore, currently it is doing the opposite).
10) Tax restructuring: Implementing negative income tax (NIT) to supplement low-income earners (a novel and excellent idea), while also considering reductions in corporate and personal income taxes.
11) Enhancing tourism potential by Expanding airports and related infrastructure;
12) Bureaucratic reform: Reducing the number of civil servants, curbing ballooning budgets, and increasingly using technology to replace manual processes.
13) Promoting Soft Power in All Forms: Develop an ecosystem to support and enhance cultural assets.
14) Adopting protectionism: To ensure fair competition in the market, especially against low-quality, cheap imports, and to develop Thai SMEs into smart SMEs producing unique products, as they cannot compete with China’s economy of scale.
Additionally, the PM Paetongtarn emphasized the ongoing plan for the 15) Baht 10,000 Digital wallet which was a major campaign pledge of Pheu Thai in the last election; 16) The Eradication of narcotics; 17) Combating online crimes; and 18) Expanding welfare for vulnerable groups. With all these plans and growing domestic confidence, the stage is set for a major uplift in the Thai economy and stock market.
As I write this, floods from Typhoon Yagi rainfall have wreaked havoc across Northern Vietnam, Northern Thailand, and Northern Myanmar. Governments are scrambling to cope with the crisis. Myanmar is appealing for international aid, but is unlikely to see much, except maybe from China. It remains to be seen if this will speed up any resolution to the Tatmadaw vs rebels conflicts…
With Best Regards
JEREMY