Biden presidency could trigger global reallocation to Asia

chinese lanterns

Less confrontational style likely to lower headline risk and may drive global investors to refocus on the fundamental strengths of Asia’s economies and financial markets.

Asian financial markets could reap the benefits if US president-elect Joe Biden proves to be more conventional than his predecessor in the White House, potentially triggering a reallocation of global capital to the region.

Consensus expectations point to a less confrontational diplomatic style for a Biden administration – creating less geopolitical headline risk, fewer market shocks and consequently reduced volatility.

We anticipate that the incoming Democratic-led US government will review its relationship with China. This will form a key narrative for the global economy in 2021.

While we don’t expect the US to reverse its policy stance on China, we suspect Biden will place less emphasis on the bilateral trade deficit. Instead he could use it as basis for negotiation as he resets America’s relationship with China and recommits to the rules-based international trade architecture.

One area of common ground could be action on climate change, with Biden a known advocate for environmental sustainability and China having stated its intention to become carbon neutral by 2060.

Any warming of US-China ties would relieve pressure on global supply chains, which would be positive for FDI into Asia.

Any warming of US-China ties would relieve pressure on global supply chains, which would be positive both for foreign direct investment into Asia and for business investment. Similarly, the signing of the Regional Comprehensive Economic Partnership (RCEP), which aims to reduce tariff and non-tariff barriers across 15 countries, should help to secure trade and deepen regional integration.

A reduction in volatility would also be positive for Asian markets in general, potentially encouraging investors to refocus on the fundamental strengths of governments and companies in the region. Asian economies are at a more advanced stage of recovery from the Covid-19 pandemic than Western peers, having demonstrated greater state capacity to manage the crisis.

In addition, we may see Biden roll back some US corporate tax cuts and deregulations implemented by President Donald Trump. That could strengthen the relative appeal of non-US companies, including those in Asia.

For now we are forecasting a split US Congress and a return to a relatively obstructionist Republican policy stance. Consequently we have toned down our forecasts for US fiscal stimulus.

The likelihood of a smaller fiscal package suggests US monetary policy will remain accommodative for longer, while we believe the economic impact of the coronavirus pandemic will be disinflationary. This could point to dollar weakness, while being supportive of Asian and emerging market currencies. We are positive on hard and local currency Asian bonds, most notably Chinese government bonds.

One unknown is how the roll-out of coronavirus vaccines will impact the global economy. Global trade has held up relatively well during the crisis to date, benefitting Asian economies that are deeply embedded in the global goods’ trade.

View Full Article – published by Aberdeen Standard Investments on 25th November 2020