The unpredictable Donald Trump presidency was perhaps suitably signed off by the recent shocking invasion of Capitol Hill by some of his supporters. Neither this, nor policy annunciation via Twitter (frequently in the middle of the night), could scarcely have been imagined before Trump. Perhaps the single most visible change of the new Biden presidency will therefore be a return to more established and predictable ways of operating.
Risk markets will welcome one less source of volatility. For emerging market assets (debt and equity) in particular, we think the new presidency should also be largely more positive. This is owing to likely changes in both US international relations and domestic US economic policy.
Return to civility and more established US foreign policy
On the international relations front, the Biden presidency presages a return to more established US foreign policy, with less unilateralism and more reliance on traditional alliances. The return to ’normality’ will be most noticeable in trade policy. It would be naïve, however, to expect US/China trade frictions to disappear or even significantly dissipate. Indeed, recognising the underlying forces of nationalism, Biden officials have already essentially backed Trump’s view of China as a ‘strategic competitor’.
Less tariffs – but China still perceived as a threat
Nonetheless, international dialogue should certainly be much more civil, and this will be an important starting point. More practically, our base case is that the new Biden administration will use tariffs less frequently. This is clearly positive for export-intensive emerging markets, especially China and nearby countries deeply integrated into its productive supply chain. It is also especially important for the global Information, Communication and Technology (ICT) sector, which relies extensively on this supply chain.
Less easy pass for world’s strongmen
While the approach under Biden should be largely more constructive for most, some countries can anticipate more familiar pressures. In particular, countries with questionable human rights records and/or geopolitical aspirations (essentially those not chiming with the US) are much less likely to get such an easy pass. Aside from China, three standout examples whose ‘strong-man’ leaders would almost certainly have preferred the Trump status quo are: Russia, Turkey and Saudi Arabia.
Re-regulation and tax cut reversal
On the domestic front too, the Biden presidential era presages significant changes. Given the vast global importance of the US economy, this could have some far-reaching cross-border consequences. For emerging markets, we foresee positive impacts through at least two key channels: 1) a trend towards ‘re-regulation’ and 2) significantly increased US fiscal spending.
The deregulation of the Trump era, coupled with a large corporate tax rate cut, further enhanced the investment attractiveness of the US. And significant global capital inflows were certainly a key contributor to US equities’ world-beating returns over the past decade. However, the Biden administration is widely expected to try to reverse the Trump tax cut – albeit probably not all the way back up to 35% from 21% at present. Additionally, the deregulatory trend is very likely to reverse, partly in order to reinstate the watered down environmental standards of the past few years. Other things equal, these changes would tend to lessen US magnetism of global capital.
Conversely, other global risk assets, including emerging market risk assets, should seem more attractive.
Path cleared for substantial US fiscal stimulus
On the fiscal front, a Biden (Democratic) presidential victory was always expected to entail accelerated US government spending. However, recent run-off elections in the state Georgia helped as the Democrats now effectively control both US Houses of Congress. This means the path for substantial further US fiscal stimulus has been eased significantly. We believe this is positive for emerging market risk assets as increased US spending suggests a higher US current account deficit, which is typically negative for the US dollar. This is important because a weakening dollar makes non-US investments more appealing for global investors.
Emerging market debt implications
Most of the above considerations bolster the general case for all emerging risk assets. However, looking more closely at emerging market debt, which is the speciality of this author, the case for some areas looks stronger than others. All segments of the emerging debt complex were heavily sold during the peak period of pandemic fear in March 2020. Yet, we saw a powerful sustained recovery thereafter, making the overall valuation story somewhat less compelling.
View Full Article – published by Aberdeen Standard Investments on 20th January 2021
— Aberdeen Standard Investments UK (@ASInvestmentsUK) January 21, 2021