Which Asia Pacific countries have the most to gain, and which the most to lose, from the Biden presidency?
Answer: Most to gain – emerging markets (ex-China)
Most to lose – China
Joe Biden Jr. knew what he was getting into.
Now that he is in office, the 46th president of the US has his hands full trying to find a way to unite his people and guide the US through the coronavirus pandemic, while preventing an economic decline. Plus the world's eyes will be on how he will deal with “the China problem”.
Biden's actions, particularly regarding the US economy and China, will have a ripple effect on Asia Pacific markets. On February 2 and 3, Asian stock markets rose for two consecutive days over mounting trader optimism ahead of Biden’s discussion with the US Senate over a $1.9 trillion economic stimulus package.
The geopolitics in this region could prove to be particularly sticky. Biden’s predecessor Donald Trump spent four years focusing on bullying and unilateralism, provoking trade wars with numerous countries. Early in his tenure he pulled out of the Trans-Pacific Partnership (TPP), which would have lowered trade barriers between 12 countries including several in the region. After the US’s withdrawal, the remaining 11 countries signed a new agreement known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
China was all too willing to step into the leadership void left by the US's withdrawal. As 2020 came to a close, Beijing agreed on two major multilateral deals: the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement with 14 other Asia Pacific countries; and an investment deal with the European Union. If anything, the shifting power and influence between China and the US benefited Asia Pacific – as seen through these multilateral trade agreements.
Biden appears set to change course once more and attempt to re-engage with international democracies in particular. This is likely to mean an ongoing tussle for allies and influence between the world's largest economies, which may continue to redoun to the benefit of the Asia-Pacific region.
The Biden presidency is also likely to mean a return to more “normalised” geopolitics that focuses on traditional diplomatic channels and negotiations (i.e. not via Twitter). As a result, it is unlikely that Asia's politicians or investors will wake up to fresh decrees, regulations or trade tariffs out of nowhere. In essence, politics and relations will remain tense, but in a more predictable and stable manner.
For emerging markets investments this is likely to prove particularly important. Already, valuations in many such markets are attractive. According to British asset management firm Schroders, there is a wide valuation gap between the MSCI's Emerging Markets index and its World index that tracks developed market equities, whne measured by price/12-month forward earnings ratios. This has historically preceded outperformance by the former over a two-year time horizon.
Institutional investors have also said they are looking to shift allocations from US equities to EM stocks, even if markets are recovering at varying paces. As the Covid-19 vaccine take-up increases and the world emerges from the pandemic, economic outlooks have become more positive.
South Korea is a particularly attractive market. Its traditionally strong military and economic alliance with the US was undercut by a Trump administration that did not appoint an ambassador to the country for 18 months, regularly excluded South Korea from talks with North Korea and pressured Seoul to spend billions more on US military troops stationed in the country. The Biden administration will likely prove far more welcoming.
In addition, Dutch asset management firm Robeco highlighted South Korea as one of its favoured markets because of its strong handling of the pandemic, 3.1% GDP growth forecast for 2021, and the government's fostering of green energy intiatives and digitalisation. These factors may help further bolster a a stock market whose Kospi benchmark index already rose 30.8% last year, largely on the back of rising tech shares
People in other markets may have more cause to miss Trump. He enjoyed support in Hong Kong and Taiwan and in Vietnam and the Philippines due to his opposition to China's attempts to strongarm the former and its territorial disputes with the latter over the South China Sea.
Yet, contrary to popular opinion, it is unlikely that Biden will go easier on China than Trump. He’ll just be more polite about it.
The new president does not intend to immediately remove trade tariffs on Chinese goods, and he hinted that he intends to combat Beijing's growing ambitions by taking a multilateral approach with like-minded countries (think Japan, Korea, India, Australia, Vietnam, the Philippines and others). Biden also said he would be tough on “China’s abusive practices”, which includes intellectual property theft and forced transfers of technology from American to Chinese companies.
The verdict is out for now on how Biden handles issues such tariffs between the US and China, which affects supply chains and agriculture, manufacturing and consumer goods. And it is possible he seeks agreements with Beijing over measures to combat climate change. But while the relationship of the US and China under Biden is likely to be less heated than before, it is set to remain detached.
To be clear: Chinese markets will probably continue to grow in the Year of the Ox. But they won't get a lot of help from Biden.