China-US leadership changes to benefit Asia

With leaders taking or about to take their seats at the helm of the world’s two most powerful economies, financial institutions have expressed optimism over the potential benefits for Asia, and markets more broadly.

This week saw Democratic US President Barack Obama secure a second term in the White House after winning 303 Electoral College votes to Republican challenger Mitt Romney’s 206, at latest count.

On the back of this election Beijing stages its 18th Communist Party Congress, when it is widely expected to name vice-president Xi Jinping as general secretary and head of the standing committee, paving the way for him to be appointed president.

One major impact of Obama’s victory is that it significantly reduces geopolitical risk, reckons Thanos Papasavvas, a fixed income and currency strategist for Investec Asset Management.

He notes that Obama will uphold America’s status-quo with China, allowing Sino-US relations to remain conciliatory at a time of delicate political transition for China. By contrast, Romney had pledged to label China a currency manipulator, which would likely have triggered trade sanctions.

“In the current market environment where geopolitics plays an important role in investor sentiment, continuity in foreign policy directives is paramount to the continuing stability of markets,” says Papasavvas.

Jun Ma, chief economist for Deutsche Bank, echoes this view, highlighting Obama’s win as a positive for China and Sino-US relations, relative to a Romney win.

He suggests it will provide policy certainty and therefore less volatility for the global economy, with 20% of Chinese exports going to the US market. “China should worry less about a sudden change in policies and export demand from the US under Obama,” Ma states.

But John Greenwood, chief economist at Invesco, sounds a note of caution for Asia: “We should expect a continuation of slow, sub-par growth in the US economy, with few uplifting effects on Asian trade or economic growth in the short-run.”

Ever since the Republican Party won control of the US House of Representatives after Obama’s mid-term election defeat in 2010, the US president has found it hard to push through legislative plans.

“[And] since the Republicans are unlikely to lose the House, we should expect the current gridlock between the president and Congress to continue,” Greenwood adds.

Still. the outlook for China’s economy is more positive, given that it is unlikely to see a dramatic policy shift in keeping up with its own version of status quo.

“The new leaders will be mindful that they carefully orchestrate the transition, with no policies deemed to be an attack on their predecessors,” says Tan Suanjin, an Asian fixed income portfolio manager at BlackRock.

Partly this means continuing to direct its economy towards a consumer-based model, with China expected to make investment into urban infrastructure including public transport and sanitation.

Further financial-market reforms are also eagerly anticipated, with liberalisation of its equity, bond and foreign exchange markets to come. The China Securities Regulatory Commission recently reduced its requirements for foreign fund managers looking to invest in its domestic market.

“The investment opportunities which could follow these structural reforms are enormous,” notes Ning Jing, Asian equity portfolio manager at BlackRock. “This could be the time for a longer-term investor to take advantage of the current attractive valuations in the Chinese equity market.”

Ryan Tsai, senior investment strategist at UK-based private bank Coutts, shares this view. He has pointed to an increase in government infrastructure spending after the leadership reshuffle and sees value above all in the construction sector, which would be in line to benefit.

Beyond Asia, this week, Deutsche Bank voiced its view that a win for Barack Obama offers a higher chance that the fiscal-cliff issue will remain unresolved, leading to tax increases and a cut in government spending from January that risks plunging the US economy into recession.

That could spur a buying opportunity for the US dollar, with David Woo, the bank’s FX and rates strategist, reasoning that the realisation of the US fiscal cliff would raise the odds of a Chinese hard-landing and intensify the eurozone recession, leading the dollar to become a safer currency alternative.

Joanna Shatney, head of US large-cap equities at Schroders, sees getting the US election out of the way as a positive for the domestic equity market, where valuations remain attractive next to the bond market.

"We expect a positive year for the [US] equity market in 2013," she says. "The question is, when will we see the catalyst which makes investors take advantage of this value?"

She notes, too, that the housing sector is picking up, which should have a positive effect on consumers. She sees opportunities in consumer discretionary stocks in line to benefit from the confidence this brings. "We also expect it to be positive for financials," she adds.

But others point to US equity-market risk, in particular to defensive stocks with “bond-like” characteristics such as health-care that have regular dividend pay-outs.

Such equities will likely be impacted by Obama’s plans to raise both the taxes on upper-income earners and the 15% dividend tax rate, reasons Barry Knapp, equity portfolio strategist at Barclays Capital.