A Biden victory: First thoughts on what it could mean for Asian investors
Implication on China's macroeconomy
Aidan Yao, Senior Emerging Asia Economist
- We think a Biden presidency will lead to some tactical changes in America’s China policies, although the overall competitive nature in the relationship is unlikely to change. We expect to see a de-escalation of tensions in trade, as Biden criticized that US economy has suffered from the trade war. Even though we don’t expect the tariffs to be rolled back immediately, more constructive trade talks could bridge gaps in the negotiation, helping to remove an overhanging risk for financial markets and economies.
- In comparison, we are less optimistic about the US and China resolving their tech disputes. While the new President may adopt different strategies and tactics, both countries will likely continue to see each other as arch-rivals in this field and find ways to indigenize frontier technology that is increasingly viewed as matters of national security. Hence, even though Biden may use less sanctions, trade restrictions and entity lists against Chinese firms, the chance of the US and China working together to push the technology boundary of the world is still quite low. Compared to reduced trade tension, a decoupling in core technology, such as 5G, could setback globalisation and inflict lasting pains on the global economy.
- Outside the economic sphere, we expect Biden’s actions in areas of human rights, issues relating to Taiwan and Hong Kong, and geopolitical disputes in the South and East China Seas, to be less unilateral and better calibrated to account for the interests of US’s allies in the region. Democratic presidents have traditionally shown less courtesy to China in these areas than their republican peers. With the US’s public opinions turning “unfavourable” of China and Trump’s “anti-China” policies receiving bipartisan supports, Biden will likely face strong pressure to adhere to populist public and political views. Therefore, we think these issues, in some occasions, could drive up market volatility. But anything short of a full-scale military conflict, a tail-risk in this case, is unlikely to cause any material damages on Asian economies.
- Overall, we think the US election result represents a modest positive for Asia. The lack of a unified congress will create some hurdles for a sizable fiscal stimulus package in the near term, but we still expect a watered-down plan to be passed in early 2021. The bigger obstacle lies with advancing Biden’s infrastructure spending agenda, although it means that reversing Trump’s tax cuts and tightening regulations will also be more difficult. The overall US economic outlook is somewhat dimmer than that under a “blue wave”, but still decent if the new administration can strike a better balance between fighting the pandemic and keeping the economy open. For Asia, while the region’s improved macro fundamentals will put upward pressure on interest rates, we think that will be curbed by the Fed’s continued monetary stimulus as it assumes the heavy-lifting role in economic support.
Implication on Asian asset classes
Simon Weston, Senior Portfolio Manager, Asian Equity
Jim Veneau, Head of Asian Fixed Income
- We think the result is a Goldilocks outcome overall for Asian investors – not too hot, not too cold, but just right. It’s also, “safe to go back into the water.” Expectations are largely driven from the global markets, that there will be limited policy impacts but a change in tone or rhetoric.
- Equity markets have generally welcomed the US election results:
- Lack of ‘blue wave’ and a potential deadlock in Congress could mean some Democrat policies, perceived to be market-negative, will be more difficult to be enacted, including tax rises, more regulation, etc.
- Trade tensions are likely to be eased under a Biden presidency, which may lead to rollbacks of tariffs. This is especially relevant for Asia/China.
- Lack of ‘blue wave’ also lowers the likelihood of massive stimulus package with potentially inflationary consequences. We saw market had previously begun to position for this, with rotation into value/cyclicals, and pick up in bond yields, etc; this rotation has begun to unwind back into growth sectors, indicated by Nasdaq’s outperformance last week. The same rotation is also taking hold in Asian Equity markets.
- Global equity strength and USD weakness are carrying over positively into Asian credit spreads and FX. Emerging markets benefit from the dollar slump as it takes the pressure off their currencies. We have seen markets such as Indonesia and India performing strongly.
- For Asian credits, in the near term, we can resume a regional focus where a positive risk sentiment and risk to the upside for US Treasuries suggest adding high yield credit (which has been recently weak and offers some relative value), remaining short/underweight duration, and incrementally adding unhedged local currency exposure (rates and/or credit).
- Risks remain as market narrative tilts back to the COVID-19 development. While all eyes were on the election, the virus has been rampaging and threatens to derail what economic recoveries are already underway in major western economies. It’s almost certain that the resurgence of virus and the re-introduction of lockdown measures will have a negative impact. It’s just unclear how big and how protracted. Markets currently seem to have limited concern on this latest development, and that could change and cause some unwinding and volatility. Asian exporters may also be implicated as the second wave of virus hinders the recovery of the European economies.
- Not necessarily a negative risk, but one that would cause a fair amount of repositioning is the run-off for Georgia US Senate positions. This could swing the Senate Democratic and would put all the stimulus and legislative scenarios back on the table. This is not a low probability outcome, either, so even the runup to the event will likely cause market volatility as polls fluctuate around likely outcomes.
- Lastly, a low probability event but certainly a fat tail is a successful challenge in the courts by Donald Trump. Currently, markets give this occurrence zero probability; so, if it develops it would have huge implications and would be an historic gamechanger.