Investors bank on Biden getting strategic with China
Investor nervousness about the outcome of the US presidential election in less than a week (November 3) is piling onto existing stock market jitters about lingering economic weakness and rising numbers of coronavirus cases.
However, the impact of the election on Asia is likely to prove limited, with the value of the US dollar versus other currencies potentially being the most immediately consequential outcome.
Stocks across the globe posted their biggest decline in several weeks on Monday (October 26) – the Dow Jones Industrial Average fell 650 points or 2.3% while the DAX dropped over 3% – as the US, Russia and France set new daily records for coronavirus infections. This poor performance continued into Tuesday (October 27), with the Dow and DAX continuing to slide on disappointing corporate earnings and no positive news from the White House on a Covid-19 relief package.
The Trump administration shoulders a large portion of blame for these nerves, given its refusal to implement a stimulus package, or even promote preventative measures like mask wearing. And with the election result uncertain and few signs of relief, more nervousness appears likely.
David Chao, global strategist for Asia Pacific at Invesco, said in a note this week, “I continue to expect heightened market volatility over the next month.”
Amid this uncertainty, the polling data has consistently shown that Democratic nominee Joe Biden is likely to win, potentially with a unified Congress under his party. Markets are pricing in that outcome, meaning that their focus is falling upon another key issue of the US election – the US-China trade war.
On that topic, investment experts agree – it does not greatly matter who wins the election - the stand-off will not be resolved quickly.
“Whether Americans vote red or blue on November 3, to many observers at least one thing is clear; the end of the US-China trade war is nowhere in sight,” said DBS chief economist Taimur Baig.
DIFFERENT CHINA APPROACHES
While the trade war is unlikely to abate any time soon, the outcome of the US election could sizeably affect relations between the two nations.
Andy Rothman, investment strategist at Matthews Asia, thinks China is likely to remain the driver of global growth and the world's best consumer story in 2021. If Donald Trump wins a second term, his approach to China may prove “less confrontational and more transactional, focused on jobs and trade”.
Or it could go another way; Trump could continue with a more confrontational approach, including more trade and technology sanctions, as well as efforts to delist Chinese companies from American exchanges.
“This scenario would have the president's team continue to cast China as an enemy of the US, probably resulting in (Chinese president) Xi Jinping's team deciding to start behaving like an enemy,” said Rothman.
However, from latest polling it appears more likely that next week's election results in a Biden presidency. That would probably lead to the US once again working with other democracies to collaborate with Beijing where possible and to jointly apply pressure when necessary.
“[Biden would want] to incentivise Beijing to change its behaviour, rather than rely on tariffs and delistings,” said Rothman. “Over the last 40 years, this kind of engagement with the Chinese government has significantly advanced a broad range of US interests.”
A US that wants to coordinate with regional allies with the aim of pressurising China would likely be welcomed by many countries. As AsianInvestor has reported, investors in Greater China and Southeast Asia have been increasingly concerned about political interference from Beijing.
“We see Biden taking a more strategic approach involving US allies, which will be less unpredictable for China and investors,” said Eli Lee, head of investment strategy at Bank of Singapore.
“That said, tensions are likely to remain high as the issues of fair trade, intellectual property protection and human rights are structural and not specific to Trump or Republicans.”
NEED FOR ENGAGEMENT
For all the posturing, whoever becomes the next US president will not be able to avoid negotiating with China to some degree.
“We should recognise that it is not possible to decouple from China's economy, which last year accounted for about 40% of global economic growth, larger than the combined share of global growth from the US, Europe and Japan,” said Rothman.
“Moreover, it will be very difficult for the US to address global issues like climate change, nuclear proliferation and drug trafficking without cooperation from the Chinese government.”
Meanwhile, the immediate impact of the presidential election may prove muted on investing prospects. However, a Biden victory could affect the value of the US dollar, particularly given his stated plans to invest heavily in infrastructure – which would necessitate more borrowing.
Rothman believes the appreciation in the renminbi and Asian currencies should continue post-election, as the Chinese economy rebounds and as the US dollar weakens from its current level, “especially if there is a Biden win and a Democrat sweep”.
In particular, emerging markets will benefit from a weaker dollar, continued growth momentum in the US, a solid recovery in China and a less capricious approach by Biden towards US-China relations, Lee added.
On the other hand, “if Trump retains the presidency, the situation will be largely unchanged from the status quo.”
Singapore-based family office head Cheong Wing Kiat told AsianInvestor there were “mixed sentiments among my investor friends,” about the consequences of a change at the top in the US.
“To me, there’s not much of a difference (between the candidates) and we consider that Singapore will be a winner regardless of the length of the trade war. Chinese investors trust and feel comfortable in Singapore, given that 70% of population are Chinese and English speaking.”
Another family office investor, Tuck Meng Yee of JRT Partners in Singapore, said the electoral impact will hopefully remain muted, pointing to the fact the world's central banks were ensuring that investment markets remain free of major incidents.
“It's been a pretty good year, so far, as long as you weren't in energy or cyclicals, " he told AsianInvestor. "Tech and China equities have been great. Private equity and venture capital are generally unscathed so far.”