Knight Asia Newsletter January 2025
Asian equity markets were mixed in January with the FTSE Vietnam (USD) +1.1%, the Hang Seng Index +0.8%, the MSCI Asia Ex Japan +0.6%, the MSCI AC ASEAN Index -0.3%, and the Thai SET Index (USD) -4.7%.
President Trump has begun his second term with a bang, focusing on quick impact policies combating illegal immigration and drug-trafficking. He threatened heavy +25% tariffs vs Canada (10% on oil) and Mexico, for not working hard enough to stem the flow of drugs and illegal immigrants. It is likely these tariffs will be reduced or deferred after negotiation and action. So far, additional threatened tariffs on US imports from China have been a modest +10% on selected items, for alleged complicity in the trade of fentanyl related chemicals. China has responded in kind, and filed a complaint with the WTO.
We are optimistic that China and the US will agree to a win-win deal, after President Trump & President Xi meet in person and seal a deal “on a handshake”. 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. Trump will probably seek to counter Chinese AI development by tightening up existing restrictions, or may realize it is a lost cause, after the roll-out of DeepSeek-V3 and Alibaba’s Qwen 2.5-Max.
The EU should be Trump’s next target. His determination to rebalance trade vs countries “taking advantage” of the US (especially friendly ones !), may have support amongst his supporters, but the adjustment will be painful. Combined with the recipients’ potential retaliation, a “trade war” will almost certainly trigger a global recession, and stock market correction. This may give the market sensitive President pause six months from now. Overall, we expect the biggest effect of the trade war to be on the EU simply because the EU decision-making process is very cumbersome. Europe’s overtures to start buying more Russian gas, however, will not please Trump, who wants the EU to buy more energy from the US. In the worst case, friction between the US and EU may lead to the US threatening to abandon the NATO alliance. Probably, the EU countries will have to increase military spending, and cut aid to Ukraine.
However, President Trump is also acting quickly on global “peace” deals. PM Netanyahu has already visited the White House, and got much more than he likely expected, with Trump proposing the US to annex Gaza. A dialogue with President Putin is probably already well advanced behind the scenes and could be formalized soon. The new administration’s cabinet nominees have generally been confirmed by Senate committees already, despite many being smart and disruptive talents. Most relevant to Asia are 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.
Southeast Asian markets will mirror other market declines initially, although economically they should benefit from shifting manufacturing in the medium term. ASEAN leaders generally plot a middle course between economic dependency on China and the USA, whilst also trying to stay non-aligned geopolitically. The downsizing of USAID after absorption into the state Department may reduce the US’s already modest “soft power” in the Region. Asia-centric RCEP should continue to progress, whilst the much broader BRICS grouping could be de-emphasized, and the alternative reserve currency initiative mothballed. 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 domestic market. Myanmar’s ongoing conflict remains a dividing factor in ASEAN, but we are hopeful of a China/Thailand brokered solution, with the de facto Federal system becoming enshrined in a new constitution with the states/divisions having more self-government.
In Thailand, heavy smog now dominates everyone’s conversation rather like the weather does in the UK. Most parts of Thailand have PMI 2.5 of 150 or more, whilst neighbouring Cambodia & Vietnam are under 50. Thailand is surrounded by mountains on 3 / 4 sides, which protect it from Pacific & Indian typhoons, but seems to have trapped the smog at low altitudes. Last year’s light rainy season, colder weather and less airflow have also contributed. Unfortunately, there are no quick fixes, especially since crop-burning is favoured in Pheu Thai and Bhumjaithai political strongholds. This is the biggest test for the new administration. Pheu Thai recently won just 16/47 of the PAO local government elections, and with this disappointing result it may be a difficult time to challenge the farmers who are a key part of their voter base.
With Best Regards
JEREMY