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1st June 2017 | Dubai
By, Christopher Chu, Fund Manager – Asian equities, Union Bancaire Privée (UBP)
Market optimism towards President Trump’s expectations of tax cuts, infrastructure spending, and deregulation could come under pressure should party infighting and opposition persist. Global equities rallied following his election on anticipation that a Republican controlled White House and Congress could flawlessly push forward a pro-growth agenda. The gullibility of this trade was further extended as soft and hard data could not coalesce into evidence of a clear economic recovery. Soft data, including consumer and business confidence reports remained elevated, while hard data of actual consumer and business spending was lacklustre.
Exacerbating the aforementioned disconnect are some strong calls that President Trump may indeed be unfit to serve in the White House, with the current maelstrom unlikely to settle down on its own. Lacking political capital and seeing support from his allies within the party fading essentially begins the transformation of the President into a lame duck. The USD index and the 10/2 yield spread have fallen below levels following his election, suggesting that regardless of President Trump’s fate, domestic growth is expected to be sluggish at least for the remainder of the year.
Risky assets that have benefited from the Trump reflation trade seem likely to experience a correction as valuations have become stretched while earnings reflect a sluggish domestic economy. However, regardless of the impending overhang in the White House, there is still a case to argue that the outlook for Asian equities should remain attractive. While Asian markets rallied along with renewed risk sentiment for the global economy, regional bourses were mainly lead by fading deflation worries in China, resilient domestic demand in Southeast Asia and reform prospects in South Korea.
For 2017, expectations for a recovery in China’s economy had been seen as the second pillar to drive global growth alongside the renewed investment cycle in the US. Beijing implemented politically difficult supply side reforms while infrastructure spending spurred commodity prices higher. More importantly, a pickup in domestic activity reassured investors that economic data was transitioning from quantity to quality. China’s declining trade surplus with regional markets suggested that more imported goods were used for final consumption and not re-exported. Pickup in outbound tourism flows into ASEAN exemplified the economic shift towards experience consumption, while strong demand for e-commerce services was evident in Tencent’s first quarter results.
Better quality economic growth matters for Asia should US economic data begin to disappoint. Rising intraregional links and multilateral trade act as policy fulcrums, particularly as Asian economies have incrementally become more aligned to emerging market demand. President Trump’s foreign policy towards Asia has taken a big step back from his campaign promises. He has reversed his decision to label China as a currency manipulator, maintained military alliances in South Korea and Japan, and refrained from trade protectionist policies. All of these could reflect his need to reposition himself after demonstrating an impractical choice to withdraw the US immediately from the Trans Pacific Partnership upon taking office. Were President Trump eventually to implement any protectionist policies, this decision would prove to be quixotic and likely to achieve the opposite effect by generating higher costs from the disruption of supply chains and production inefficiencies.
The Trump administration’s initial policies have yet to become disruptive to Asian economies; however, his influence as an unofficial spokesman for nativism has penetrated into regional markets which have shown the potential to become more unsettled in response to such policy. A gubernatorial election in Indonesia’s capital of Jakarta and the appointment of a new Chief Minister in India’s Uttar Pradesh raise speculation over the economic commitments pushed by their respective predecessors. Thus far these concerns have yet to materialize, as both Indonesia and India are reaping the benefit of recent policies including tax reforms, which have attracted foreign inflows and strengthened the currencies so far in 2017. This bodes well for both Indonesia’s President and India’s Prime Minister, who both maintain high approval ratings.
This stands in contrast to the US. Following the Republican’s highly unpopular passing of the healthcare repeal bill (“Obamacare”), many voters may decide to promote leadership from the left and reward the Democrats with full congressional control. Assuming that President Trump avoids exacerbating any further problems between now and then, impeachment calls would be likely to surface under the Democrats, mirroring Nixon’s Watergate scandal and his subsequent resignation in 1974. Anything between a lame duck President and impeachment creates the likely distraction that would do little to address an anaemic economy in the US. Without fiscal stimulus policies, the onus to generate growth is likely to fall on the Federal Reserve which is already engaged in interest rate normalization in response to steadying wages and falling unemployment. In considering market sentiment, it is no longer possible to challenge the Federal Reserve for falling behind the curve. Without an external fiscal stimulus, there is less upward pressure for the USD to appreciate, which partially explains why the 10-year yield still remains above the election night level.
Asian equities remain an attractive asset within the emerging market class. Domestic demand proliferation bodes positively for the region’s larger economies of China and India, while a renewed CAPEX cycle in ASEAN pushes forward much needed investment. Reform driven policies drive confidence, already evident in South Korea where the new president looks to address economic and restructure chaebol investments. Trade demand and exports have lifted South Korean and Taiwanese markets with growing shipments to China, but given strong market share and dominant technology products, their products are also competitive in the US.
More importantly, Asian equities are also supported by policies sharply-focused on medium and long-term objectives. China’s People’s Bank of China has raised short-term interest rates in line with the Federal Reserve path while also working to address off balance sheet items such as wealth management products which misallocate credit. The Philippines looks set to push a tax bill to raise government revenue to support much needed infrastructure projects, following steps taken by Indonesia which had its investment grade raised by S&P following a successful tax amnesty and budget curbs. China’s push for multilateralism was on display during Beijing’s One Belt One Road conference in May, which looks to reestablish historical trade and security ties. Risky assets are vulnerable amid the impeachment cloud that overhangs the Trump administration, but for Asian equities, the only thing to expect is turbulence.
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