The article was first published in The Business Times on 22 Nov 2024.
Democracy has spoken. And rarely as loud, proud and unambiguous as the landslide message communicated by the US electorate on Nov 5. The electoral vote, the popular vote, the flipped Senate and the retained House of Representatives.
Donald Trump’s mandate for change is overwhelming and will reverberate globally, with the echo and consequence most keenly felt, I suspect, in Asia.
Rightly or wrongly, by accident or design, Asia finds itself in the crosshairs of the Trump administration and its policymakers.
A Harris victory might have represented benign evolution and continuity of policy under President Joe Biden; we will never know. But a Trump victory signals essentially the opposite, manifest and reflected via every major political, economic and financial transmission channel of consequence.
It is not an exaggeration to suggest change is being thrust upon Asia. Profound, rapid and largely involuntary.
In the cross-border fields of trade, currency, risk appetite, and politics and geopolitics, the influence of the new administration in Washington throughout the region will be far-reaching. Unfortunately, it will also be challenging, possibly malign and likely to take effect sooner – think the first half of 2025 – than later.
China trade
The complex relationship between the US and China is fundamental to America’s wider engagement with Asia, with trade playing a pivotal – and bipartisan – role.
The complex relationship between the US and China is fundamental to America’s wider engagement with Asia, with trade playing a pivotal – and bipartisan – role
From the US perspective, its trade relationship with China is both symbiotic and parasitic. With China expected to post a trade surplus with the US in the amount of US$350 billion for 2024, bilateral trade ties are significant, positioning China as one of the US’s most important trading partners.
On the other hand, perceptions around China’s unrestrained mercantilism raises concerns in the US about the export of surplus capacity, currency manipulation and market distortion.
Meanwhile, the ambition of a home-grown manufacturing renaissance is driving the US to “bring back jobs” to “make America great again”. Arguably, this was a key part of the Trump administration’s election pledges, enabled – in part – by the proposed exercising of (optically) compelling tariffs and quotas.
With China facing tariffs of up to 60 to 100 per cent on goods exports, and the rest of the region expecting an exports tariff of 10 per cent, the stakes are high.
Yet, it is worth remembering that we have seen this movie before. In 2018, Trump targeted around US$360 billion of Chinese imports, aimed at curbing intellectual property theft and reducing the US trade deficit. Subsequently, Chinese exports to the US in key sectors like electronics, machinery and consumer goods saw reduced growth, which contributed to a slight dip in China’s overall gross domestic product growth.
Overall, I would say that the direct impact of the 2018 tariffs was limited. Indirectly, however, the effects were more consequential, (negatively) impacting global corporate confidence and leading to reduced investment in capital expenditure.
Make no mistake, were tariffs imposed on China at the levels being discussed currently, their effect on China’s growth would be severe. But at the global level, it is the second-order risk around confidence to trade and invest which I feel could be more concerning, particularly if they impact (the inherent fragilities around) a soft-landing scenario.
Fed rate cuts impact on Asia’s capital flow. Read on.
Trump trade
From a regional growth perspective, however, more pervasive and far-reaching than tariffs would be the ripple effect across Asia of US fiscal and monetary policy under the new administration.
In our view, Trump’s renewed focus on border control, tax cuts and tariffs would likely provoke a subsequent rise in inflationary pressures, meaning interest rates and bonds yields could remain higher for longer
In our view, Trump’s renewed focus on border control, tax cuts and tariffs would likely provoke a subsequent rise in inflationary pressures, meaning interest rates and bonds yields could remain higher for longer. Indeed, immediately after the election we revised higher by 50 basis points our forecast of the terminal rate by the US Federal Reserve to 4 per cent.
Inevitably and sequentially, the higher rates environment in the US will migrate to Asia, crimping the growth outlook for local economies (already impacted by reduced export growth) as central banks pause rates cuts to support their respective currencies. And accelerating the transmission effect will be the US dollar.
In a higher-rate environment, we believe US dollar strength likely will remain elevated, with important consequences for Asia, which sits squarely in the dollar trading bloc.
A strong US dollar often impacts Asian economies by increasing the cost of dollar-denominated imports, such as oil and raw materials, potentially leading to higher inflation. Additionally, countries with significant US dollar-denominated debt face higher repayment costs, which can pressure national budgets and reduce investment in growth.
Why Asia?
Against such a complex macro backdrop, the question around market opportunity would well shift from “buy Asia” to “why Asia?” While there may be attractive standalone opportunities among Asian equities, I suspect US markets will remain supreme in terms of diversity, growth and earnings.
Our recent decision to overweight US equities highlights this exceptionalism, which we anticipate will persist as the macro effects of Trump’s policies take hold. We note that the consensus outlook on US earnings growth is on par with those for Asian equity markets.
Thus, investors face a choice between risk and opportunity in Asia versus the US, and historically, they have favoured the latter. Although the strong US dollar will likely boost the earnings of the region’s businesses sensitive to American demand, it could also raise the debt servicing burden for quasi-sovereign issuers and banks that are crucial for the region’s economic functioning.
Additionally, firms with US dollar-denominated debt will likely face higher repayment costs, straining their financing and investment activities. Notably in President Trump’s first term, US dollar corporate credit spreads widened steadily during his trade war phase, although they initially appeared stable in the immediate aftermath of his election in 2016.
Overall, I feel the region will still be able to maintain reasonable growth in 2025, as the economic impact of tariffs will likely remain moderate in comparison to the previous banking crisis or global pandemic.
China’s ongoing pivot towards stimulus provides hope that the country can withstand the shock of Trump’s new tariffs, and that could anchor the region’s financial market performance. It is, however, difficult to imagine global investors flocking to Asia’s risky assets before Trump’s transactional approach yields more encouraging developments.
Currency volatility in Asia. Find out more.
Taking sides
The Trump administration’s most profound impact on Asia may be its deglobalising effect on international relations. Under previous leadership, the US appeared disenchanted with global engagement, prioritising domestic interests. This trend is unlikely to change, leaving an assertive China ready to fill the void.
The desire for the US and China to decouple from a longstanding economic and geopolitical relationship has evolved from a trade dispute into a more permanent shift.
The desire for the US and China to decouple from a longstanding economic and geopolitical relationship has evolved from a trade dispute into a more permanent shift
Asia largely orbits around China’s economy and America’s political influence, creating inherent tensions that have been managed through pragmatism and flexibility. However, this balance is fraying, evident in areas like the South China Sea and the Taiwan Strait.
As Asia’s geoeconomic dynamics shift, local investment strategies must adapt. The likelihood of military confrontations, driven by rising tensions and flashpoints, increases the volatility in the region. Economic uncertainty from potential trade deal failures and sanctions further compounds this issue.
While many Asian nations have maintained a non-aligned stance between the US and China, the economic allure of China, particularly through initiatives like Belt and Road, is hard to resist. This may lead to a realignment of neutral positions, creating new spheres of influence. Put simply, Asian countries will likely need to “take sides”.
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Source: The Business Times © SPH Media Limited. Permission required for reproduction
