Markets have responded to Donald Trump’s emphatic election victory by anticipating pro-growth policies and higher inflation. US stock prices surged as investors expect tax cuts, a fiscal boost and deregulation, US Treasury yields rose in preparation for higher import prices and greater government borrowing, and the dollar strengthened ahead of likely trade protection measures.
At the time of writing, it is not clear if Trump has achieved a clean sweep by retaining control of the House of Representatives. If he does, then as the BlackRock Investment Institute points out, it “would give a second Trump administration broader powers to enact its tax, energy, trade and regulatory agenda”.
For Asia economies and markets, the impact could be severe; alternatively, domestic resilience could help them withstand the headwinds.
David Chao, global market Strategist, Asia Pacific (ex-Japan) at Invesco warns that the main headwind to Asian markets in the near-term is from Trump’s proposed tariff policy: 10-20% tariff to all imports to the US and 60% tariff on Chinese goods, which could come as soon as the first half of next year.
An escalation of trade tensions and higher tariffs might lead to global growth slowing with export-dependent emerging markets suffering most.
However, Chao thinks markets may be “overestimating the economic impact of Trump’s proposed tariff policies to the wider Asia region. Trade tensions have persisted over the past seven years since the first trade war and many MNCs have used this time to diversify their supply chains”.
In particular, Chao doesn’t believe Trump’s proposed 60% tariff policy on China will significantly affect MNC confidence or sentiment, though the 10% universal tariff is likely to have a bigger impact on corporate capex spending – and therefore would be the biggest risk to Asia markets.
Tai Hui, Apac chief market strategist, J.P. Morgan Asset Management is also sanguine about the region’s ability to cope with higher tariffs.
“For China, the direct earnings impact from higher tariffs is likely to be limited, given more than 85% of MSCI China’s primary revenue comes from mainland China. While slower exports would impact domestic investment and consumption indirectly, Beijing’s fiscal and monetary policies could offer some offset,” he said.
“Hence, the possible measures from this week’s NPC meeting [on 8 November] could be material in countering investors’ concerns from external factors.”
Meanwhile, semiconductor exporters, such as Taiwan, should remain supported, while the structural shifts in global supply chain, given potential new trade barriers, could boost infrastructure spending in Asen and South Asia, noted Hui.
However, at Eastspring Investments Jingjing Weng, head of research, Eastspring Shanghai, warns that “this new round of potential tariff hikes could have a more significant impact on the Chinese economy compared to 2018-19. If tariffs on Chinese exports are raised significantly, further fiscal support and retaliatory measures from the Chinese government cannot be ruled out.”
On the other hand, John Tsai, head, growth equities at Eastspring Investments, emphasised that, “in a Republican sweep, fuel prices will likely be lower as more fossil fuel extraction (i.e. fracking) resumes and climate change and green policies get put on the backburner”.
This could help to keep Asia’s inflation under control as fuel prices make up a significant part of the region’s consumer price index.
The flip side, however, is that Asia is a crucial supplier of green energy products, so “electric vehicles (EV) and solar panels (China), and the EV battery supply chain (Indonesia and China) could face challenges”.”
But despite the shock and sudden uncertainties precipitated by the overwhelming Trump victory, it could be easy to underestimate Asia’s inherent strengths.
“Asian economies are resilient, face less inflationary pressures and set to out-pace developed market growth in the coming year,” said Invesco’s Chao. Several Asian central banks have started to ease monetary policies.
Moreover, “their equity market valuations are much more attractive” and many Asian economies benefit from the AI investment theme.
“Ultimately, I think investors will care more about valuations and growth differentials rather than trade tensions,” Chao said.
