US election: What’s next for Asian markets?
On Tuesday, November 3, 2020, U.S. voters decided who would hold the balance of power in Washington. President-elect Joe Biden won the election (November 7), and at the time of this writing (November 9), President Trump hasn't formally conceded defeat.¹ The control of the Senate is still unknown as there are two runoff races to be held in January 2021 in Georgia.² We examine the potential investment implications for Asian equities under Joe Biden’s presidency.
Asia, especially North Asia, could benefit
Under a Biden administration, the foreign policy order of preference is expected to be:
- Rebuild relationships with America’s allies
- Narrow the income gap
- Focus on China
From a foreign policy and investment perspective, we believe that negative sentiment is likely to soften. While we wouldn't expect U.S.-China relations to improve significantly, the bellicose rhetoric and sharp policy swings of the Trump administration might not be as frequent under a new administration. Although both sides share common ground on climate change and carbon-neutral environmental goals, human rights will remain on the agenda. Also, we don't think that the tariffs placed on China since 2018 will be rolled back; that said, the perception of trade conflicts and tension would ease.
From a U.S. dollar perspective, we expect the currency to remain weak, which should be a positive to emerging Asia as a whole, with a tilt toward the procyclical currencies in North Asia. In a split Congress scenario, U.S. tax, healthcare, and relief policies under the new government are likely to be more reactive than proactive—any discussions about further assistance will likely end in a deadlock.
With COVID-19 being the highest priority for the new administration, the U.S. economy will probably enter a W-shaped recovery and shift to a lower growth path, especially if an effective vaccine is unavailable to the general public. We view this as a positive for China, as the country has recovered well from the COVID-19 outbreak, with third-quarter GDP coming in at 4.9% (year-over-year change after growing 3.2% in the second quarter3). More capital is therefore expected to flow into China given the growth divergence. Lastly, Biden’s policies on mending ties with countries in the developed markets should favor multinational companies as geopolitical risks subside.
A closer look at the election's impact on North Asia
Over the past four years, the U.S. administration has strategically placed restrictions to hinder large-scale electronic device producers and burgeoning semiconductor developers in China. It has also executed a broader containment strategy of China’s economic development in other key sectors that has benefited high-tech producers in Taiwan and South Korea.
What will a new administration mean for North Asia?
We expect—potentially—moderate relief from the escalating U.S.-China trade and tech tensions, but the general strategy of curbing China’s technological rise may not change in the longer term. We believe investors should expect China to become more attuned to the multinational rule-based approach as the country rises in global stature. While milder rhetoric may see multinational companies in China slow the process of supply chain relocation, they'll also be interested in the “dual circulation—Made for China” agenda as prescribed in the 14th five-year plan.
A closer look at the election's impact on Southeast Asia
Ever since the U.S.-China trade war started in 2018 (and intensified in 2019), Asian countries have been focusing on self-help policies that promote growth. We envisaged that countries would organize themselves more around the concept of regionalization as opposed to globalization.
Therefore, we believe the supply chain shift for low-end tech and manufacturing production lines to Southeast Asia will continue. Also, a weaker U.S. dollar would lower the financing costs for Southeast Asian companies, which, in turn, could help to attract more foreign direct flows and investment. The recent announcement that Chinese firms will collaborate with businesses from France, Japan, and South Korea (among others) to invest an estimated US$35 billion in Indonesian nickel mines and facilities by 2033 is a case in point.⁴
In India, the path of oil prices continues to warrant attention, as the country has been benefiting from declining oil prices over the year, which, to a large extent, improves the country’s balance of payments.
It’s likely that Biden’s policy on Iran and immigration will have positive implications on India’s oil imports, as well as its information technology outsourcing industries. In addition, we believe that manufacturing growth will continue to be led by the government’s “Made in India” policies (incentives and tax cuts for domestic production) and a conducive global environment that's looking for a supply base outside of China.
Asia’s robust growth drivers remain
Although the outcome of the U.S. election will have certain impacts on North Asia and some indirect effects on Southeast Asia, it’s important to note that the result is a stand-alone event and not an endgame. Instead, it’s more a gauge of future U.S. policy direction and its transmission to Asia. Indeed, Asia possesses many growth drivers that are adapting to the way people consume, react, and transact in a postpandemic world. For one, Asia still maintains higher GDP growth differentials relative to developed markets. As the region becomes increasingly self reliant and develops its own trading, technology, and consumption ecosystem, we believe investors who want a stake in Asia will need to explore more opportunities in this part of the world.
1 “Biden Declares Victory, Calls on Americans to Mend Divisions,” Bloomberg, November 8, 2020 and “Donald Trump refuses to concede defeat as recriminations begin,” The Guardian, November 7, 2020. 2 Financial Times, November 8, 2020. 3 National Bureau Statistics of China, October 21, 2020. 4 “Indonesia sees China firms lead 'commitment' for $35 billion nickel investments,” Reuters, October 16, 2020.
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