Knight Asia Newsletter February 2025
Asian equity markets were mixed in February with the FTSE Vietnam (USD) up +1.5% (YTD +2.6%), the Hang Seng Index +13.4% (YTD +14.4%), the MSCI Asia Ex Japan +1.0% (YTD +1.6%), the MSCI AC ASEAN Index down -2.8% (-3.2%), and the Thai SET Index (USD) -9.1% (-13.4%).
It’s hard not to begin with geopolitics, as “Emperor” Trump’s first two months have gone much as expected, with his primary target being the EU. We must remind ourselves that it is the EU, not China, that is the US’s primary commercial competitor producing items such as commercial planes, armaments, autos, and financial services. China and Southeast Asia on the other hand tend to produce products that the US has no way to produce at a similar price. Economically, the EU is in a dire debt and competitiveness situation, now compounded with having to deal with Russia unilaterally, and committing to a new arms build-up they cannot afford. Past EU leaders allowed themselves to be duped by Dick Cheney & Donald Rumsfeld into expanding NATO and encircling Russia, and are now being left bewilderedly in charge of the ensuing mess!
Having driven a wedge between a very symbiotic relationship between EU and Russia, the US may now do a strategic alliance with Russia itself, since they actually have no natural conflict. The UK, will try to play the bridge between the US and the EU, and hopefully remain a quazi-US state in Europe. However, the willingness of PM Starmer to take a lead role in Ukraine is terrifying, as UK risks being drawn in to an actual war with Russia, which it can neither afford nor win. Trump can now sit back and enjoy the show. As US weapon supplies cease, Russia will likely annex the rest of the Donbas, and do a minerals deal with the US itself.
On the economic front/ trade war, the EU, Canada and Mexico have so far drawn the brunt of the new tariffs and scrutiny from the new Trump administration. In the case of Mexico and Canada it is aimed at coercing their respective governments to stem the flow of fentanyl and illegal immigrants (for which Canada seems barely culpable). We expect the US to pull back on the Canada tariffs; otherwise higher energy may feed US inflation. Mexico will have a tough time, with the US having declared the Mexican drug cartels “terrorist organizations”, we expect the US to take military action against them in the near future, if the Mexican government doesn’t do so itself. Thereafter, a border buffer zone is likely, combined with a radically beefed up coastguard vigilance to halt drugs by sea.
With all this trade friction, and geopolitical strife, it is hard to avoid the conclusion that inflation will rise again in the US and Europe triggering a recession. Certainly the over-priced US stockmarket has a long way to fall. Meanwhile, Asian governments are breathing sighs of relief, but they shouldn’t get too comfortable, as Trump will get around to them soon. Combined with a recession in the Western countries, Asian exporters look vulnerable. On the positive side, we remain optimistic that China and the US will agree to a win-win deal, after the two Emperors meet in person and seal a deal “on a handshake”. President Xi will play the long game, knowing that President Trump has but four years, and China has a millennia. Elements might include a commitment from China to reinvest surpluses into US treasury bonds, building US infrastructure on a discount, buying Boeing planes instead of Airbus, buying US oil & gas, and backing off on a possible BRICS reserve currency.
As usual, Southeast Asian governments will try to focus on regional cooperation, and remain neutral in the global games. Asia-centric RCEP should continue to progress, whilst the much broader BRICS grouping could be de-emphasized. ASEAN seems to be coming back together, with PM Anwar inviting ex-Thai PM Thaksin to be his adviser; and the new Indonesian President Prabowo looking to raise Indonesia’s influence and trade outside its own massive 300 million person domestic market, including establishing a US$ 1 trillion sovereign wealth fund, modelled on Singapore’s Temasek/GIC duopoly. This group of seasoned statesmen, including the Sultan of Brunei may forge real cooperation within ASEAN.
In Thailand, smog in the urban centres has moderated temporarily due to a few days of wind and rain, and the focus has shifted back to the sluggish economy for which there is no quick fix. Casinos will be fast tracked, but with initial rules need to be tailored to attract multi-billion dollar foreign investors. As multi-faceted entertainment complexes, the local Thais need to be attracted for recreation as well as gambling. Another major development in Thailand might be the Kra Canal which now seems to be a real possibility, if China is willing to help pay for it. Apart from circumventing Singapore for some long-haul shipping, it would foster economic development in Southern Thailand and. Ultimately, with household debt hard to negate, Thaksin will have no choice but to inflate the asset side of the population’s balance sheet, boosting the mid-priced property market and also the stockmarket. We recommend to go overweight.
With Best Regards
JEREMY