Asian equities lost ground over the past two weeks as investors digested the news of Donald Trump’s victory in the US presidential election. Outflows were heaviest from Taiwan and Korea over concerns that his victory could prove negative for technology supply chains.
Since the election, we have continued to see a strong rotation in the market, with value sectors such as materials and financials outperforming while quality and momentum stocks retreated. We see this as a sign that investors recognise the world is now embracing both reflation and the normalisation of interest rates.
It is our view that Trump as president should be generally supportive for Asian equities, as his announced intention to increase US fiscal spend should benefit the region.
A policy shift towards fiscal stimulus has historically correlated to a weaker US dollar, which should bring stability to Asian currencies and capital flows. Moreover, higher real growth in the US should further benefit Asia as it leads to increased demand for Asian exports - assuming the Trump administration does not place harsh import tariffs on Chinese goods being exported to the US – either directly or indirectly.
While we believe it is likely that the US Federal Reserve will increase rates in December, we think the path to normalisation will be gradual. Historically, a gradual rate hike has been followed by a weaker dollar, as expectations are usually priced in well in advance and as expectations readjust to the “new normal”.
We recognise that the presidential transition period will result in some uncertainty alongside higher risk premiums in the short term, which could be negative for Asia.
Further, the scope of possible trade sanctions against Asian countries or, for instance, the potential for technology supply chains to be relocated or disrupted, remains a major source of uncertainty.
However, we think that full-scale action on both counts is unlikely given the degree to which consumers benefit from these supply chains and extent of leverage China has over the US - China not only serves as a large market for US companies but also owns 12% of the US Treasury market.
India’s Prime Minister Narendra Modi made a surprise demonetisation announcement on November 8. In an effort to crackdown on the black market and reduce counterfeit currency in circulation, INR500 and INR1000 notes - together accounting for approximately 85% of currency in circulation - would immediately cease to be legal tender.
While the amount of black money in the economy is not entirely known, various estimates indicate that the “black” economy (not accounting for smuggling and illegal activities) could be at least 20%-30% of India’s nominal GDP of $2.1 trillion.
We view this as a bold move by the government to curb the black money in the system. While we expect to see a negative impact on consumption and growth in the near term as India is primarily a cash-based economy, we ultimately view this as a long-term positive; the measure should return some of the questionable money into legitimate channels, improve tax compliance and eventually lead to a reduction in fiscal deficit.
We see this move as testament to the government’s intention of implementing key reforms despite the political constraints, and think it will help in a more efficient transition to the new tax (GST) regime scheduled to be implemented next year.
In terms of our portfolio, we had positioned for a policy change from monetary to fiscal going into the US presidential elections and had moved our portfolios towards the out-of-favour value sectors, such as energy and materials. This has enabled our portfolios to hold up well through the recent market turmoil.
Our best defence in these times is our flexible approach which has allowed us to tilt the portfolio towards change (reflation) without ensuring we are beholden to any one macro factor. Specifically, we have seen some opportunities within India post the market sell-off in reaction to the demonetisation measures announced recently.
Insights and Resources