Bright opportunities await investors in Asian emerging market equities post-US elections, whoever wins the White House next month. The biggest concern among Asian investors is that there may be greater risk aversion in the short term if the US dollar strengthens in the wake of uncertainty arising from contested election results. However, this may still present a buying opportunity for investors in Asian equities.
“While we’re waiting for the election results, there is the possibility of a heightened risk aversion. In that case, most of the time you will see a near-term pickup in US dollar strength and usually when the US dollar strengthens due to risk aversion, Asian markets have a negative correlation and there could be some weakness. But for us, if that were to happen, it would be a very nice buying opportunity. The outlook for Asia still looks very good going to next year,” says SooHai Lim, head of Asia ex-China equities at Barings.
In case of a Joe Biden win, Julius Baer analyst David Alexander Meier says, there will be a high probability that US President Donald Trump will follow through with his earlier proclamation and dispute the result.
“The ensuing uncertainty should not last long, however, and be cleared up by January 20 2021 at the latest. Given the persistent uncertainty due to the Covid-19 pandemic and the absence of fiscal support due to the fierce political battle in a highly polarized country, asset valuations could come under severe pressure between November 3 2020 and January 20 2021, before recovering once the dispute is settled,” Meir says.
In the long term, there will be bigger opportunities once the clear winners are decided. “I think once the winner of the White House is known, and whether there’s a clean sweep of Congress or not, then investors by themselves can actually position on the winners based on the policy agendas of the candidates,” Lim says.
“For example, a Biden administration, especially if the Democrats sweep Congress, could be positive for Asian markets because looking at the policy agenda, you would expect the Democrats to be a lot more aggressive in fiscal stimulus and that would translate into a stronger US growth outlook. And usually that’s a good environment for Asian markets or economies,” he notes.
Even if Biden were to raise taxes on some US corporates, and as a result US corporate earnings were to be adversely impacted, Asian markets might look better because there would be no such negative impact on the earnings of Asian corporates. Biden is also committed to sustainable or green investing, which stands to benefit many Asian corporates who are exposed to this sector.
On the other hand, if Trump wins, there will be no tax hikes for US corporates. Trump is also expected to pursue more fiscal stimulus which will positively impact the US corporate sector and the economy.
In any case, no matter who wins, US fiscal policy is likely to remain accommodative and a structurally widening fiscal deficit can weigh on the US dollar. This is positive for Asian currencies and local bonds, according to Goh Rong Ren, portfolio manager, fixed income, at Eastspring Singapore.
“On balance, given that the administration’s foremost priority is to get the US economy back on track, we do not expect the new policies to derail the current benign investment environment. As such, we see Asian currencies benefiting against a weak US dollar backdrop,” Ren says.