This Is Looking Like the Best of Both Worlds for Asia’s Markets
(Bloomberg) -- A likely Joe Biden presidency and a divided U.S. government is being touted by market watchers as a favorable election outcome for Asian assets.
Regional stocks, particularly in China, stand to gain from a more conventional trade policy under Biden, they say. With Republicans looking likely to maintain their slim majority in Senate, falling odds for major debt-financed stimulus are seen keeping U.S. rates lower, much to the benefit Asian emerging-market bonds and currencies. South Korea’s won is seen as a key beneficiary.
“This outcome is the best of both worlds,” Ken Peng, head of Asia investment strategy at Citigroup Inc.’s private-banking arm, said about the possibility of a divided U.S. government. A split Congress and smaller fiscal stimulus will keep “rates lower and U.S. dollar kind of on the backfoot, so that’s also positive for global risk appetite.”
Such optimism was on display in Asia on Thursday, with equities and most currencies in the region trading higher. The following charts and comments by market watchers show the further potential impact on Asian assets:
A possibly less confrontational approach to trade policy by a Biden administration could shore up investor sentiment toward China and export-dependent economies in Asia, such as South Korea. This is especially so when coronavirus infections are soaring in the U.S. and Europe and fund managers are concerned about the valuation of American equities.
“North Asian markets continue to offer quite strong opportunities for investments,” Ray Farris, South Asia chief investment officer at Credit Suisse Group AG, said in a Bloomberg Television interview. “The Asian market, especially China, is less volatile than the U.S., it’s less correlated, and China in particular has Covid under control. It has fiscal and monetary stimulus that is supporting a stronger-than-expected economic recovery.”
Asia’s cheap and economy-sensitive companies, Chinese internet names and Indian software exporters are among stocks that analysts say are most likely to benefit.
In the currency space, the Chinese yuan and the won have been riding a continued decline in the dollar since March. Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney, still sees the greenback in a cyclical and structural downturn.
“Markets don’t like uncertainty, so this should be positive for risk assets and it also means the dollar may lose some of its safe-haven bid,” he said.
Citigroup Inc. recommends pulling bearish bets against the offshore yuan and the won, saying that it is bullish on Asian currencies, particularly in the North, over the medium term.
“Corporates may feel more confident to make investments and convert a larger share of their export proceeds to local currencies if the policy direction is less uncertain as was under President Trump,” the bank said in a research note.
The Treasury yield curve bull flattened on Wednesday as investors unwound bets on a Blue Wave. Receding odds of a large fiscal stimulus is boosting expectations for the Federal Reserve to keep its accommodative policy for longer, weighing on U.S. bond yields.
“There can’t be any conviction about the size or timing of a fiscal stimulus unless there is a last-minute swing back toward the ‘blue sweep’ scenario,” said Chris Iggo, chief investment officer of core investments at Axa Investment Managers. “Significantly higher U.S. Treasury yields and a steeper yield curve have been taken off the table for now.”
A flatter U.S. curve has been typically supportive of inflows to relatively higher-yielding emerging markets. Demand for carry was underscored by a rally in Indonesia’s rupiah on Thursday, which surged to its strongest level in almost four months.
“Lower interest rates overall will mean that lending is less expensive, so I see this positive for the IPO and small-cap market,” said Paul Sandhu, BNP Paribas Asset Management’s head of multi-asset quant solutions and client advisory for Asia Pacific. “Investors will be buying opportunistically and I see this happening more in the tech, digital and energy-transition sectors in the U.S., and substantial inflows into Asia as well.”
READ: Credit Markets Rally on Prospect of Divided Government in U.S.
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