Asian equities

Can Asia duck the Donald?

Scott Thiel |11-Nov-2016

After two weeks of frantic market activities in the wake of the US election, we’ve summarised our current thoughts on the implications for Asian Equities and our portfolios.

 


What we do know

The world is embracing reflation and a normalisation of interest rates.

Higher real growth in developed markets could potentially support better global trade growth and benefit Asia. However, we recognise that the transition period to a Trump administration could mean uncertainty and higher risk premiums in the short term which could hurt Asia.

The path of the US dollar (USD) is crucial for Asia. An increase in US fiscal spend should benefit Asia. A change of policy direction towards fiscal stimulus has historically correlated to a weaker USD, which should generally bring stability to Asian currencies and capital flows. While we believe it is likely that the US Fed will hike in December, we think the path to rate normalisation will be gradual. Historically, a gradual rate hike has been followed by a weaker USD as expectations are usually priced in well before hand and as expectations re-adjust to the new normal.

Fundamentals in Asia are continuing to improve after five years of sub-par growth. Some economies, such as India and Indonesia, have seen significant reform progress while corporates have cut back on capex allowing scope for a recovery in earnings growth in 2017. Asia is not yet self-sustaining domestically but the various overhauls in both macro and micro areas will increase its resilience through this period.

What we don’t know

During the election campaign, Donald Trump spoke frequently about imposing trade tariffs, particularly with regards to China. Any possible trade sanctions could lead to potential disruption or relocation for tech supply chains in particular. While it remains to be seen if President Trump turns words into actions, we lean on the side of believing that full scale action on both counts is unlikely here given the degree to which consumers benefit from these supply chains and the extent of leverage China has over the US; China is not only a large market for US companies but also owns 10% of publicly held US debt.1

We do know that regional geopolitics will also be impacted by the new administration but we will have to see how security issues around the South China Sea will play out and the extent to which markets will price this in. President-elect Trump is by nature unpredictable but we feel risks can be contained given each of the main players have too much to lose.

Our positioning

We are cautious in extrapolating two weeks’ market activities into a paradigm shift. The move from monetary to fiscal policy was already underway and we had positioned our portfolios to benefit through increased exposure towards out of favor, value sectors such as energy and materials. This has enabled our portfolios to hold up well through the recent market turmoil.

While we think it is too early to say whether or not Asia can duck the Donald, our best defence in these times is our flexible approach which has allowed us to tilt the portfolio towards change (reflation), ensuring we are not beholden to any one macro factor.

We do see some opportunity in India post the market sell-off in reaction to the demonetisation measures announced recently. While there will be short-term economic dislocation as the more cash based sectors of the economy suffer, ultimately we see long-term gain despite the short-term pain.