Market Views: How will the US election affect EM stocks?
Joe Biden may be leading in the polls, but investors aren’t writing off Donald Trump winning the US presidential election just yet. A contested US election outcome would undoubtedly cause market anxiety and turbulence, which will reduce appetite for emerging market assets.
In the run-up to the elections, Asia’s emerging markets have already seen volatility. India’s Nifty 50 has been falling over the past month, tracking a general deterioration in global markets lower, as the number of Covid-19 cases in the country has continued to rise. Its fixed income market also suffered a setback after JP Morgan decided not to include India’s government bonds in one of its flagship emerging market indexes, pointing to ongoing problems with capital controls, custody and settlement, which are still potential concerns in the country.
Elsewhere, the Indonesian rupiah has dropped 6.44% against US dollar so far this year. It is among the worst performers in Asia. Despite widespread protests, Indonesia’s government is likely to pass its controversial Omnibus law later this year, in an effort to ease the licensing process and lower the barriers of entry for foreign investment.
In Thailand, finance minister Predee Daochai resigned after just 26 days in office, citing ill-health. In neighbouring Malaysia, opposition leader Anwar Ibrahim claimed that he “has garnered a strong, formidable, convincing majority of members of parliament to form a new government”.
At the centre of investors' attention is China. Its faster-than-average economic recovery has brought relief to Asian markets. Andy Wong, a senior investment manager from Pictet Asset Management, told AsianInvestor that the team would favour a barbell allocation with shares of US and China tech leaders at one end, and the other end renminbi-denominated bonds and convertible bonds. Barbell strategies aim to strike a balance between reward and risk by investing in the two extremes of high risk and no risk assets while avoiding middle-of-the-road choices.
AsianInvestor spoke to five other investment experts and asked them how a Trump or a Biden win could impact emerging market equities.
The following contributions have been edited for clarity and brevity.
Yerlan Syzdykov, global head of emerging markets
Amundi
The Presidential race is still very uncertain, and a Democratic sweep would be a market mover, possibly leading to higher volatility in the corporate sector. Investors should remain prudent but not risk-off.
On the geopolitical risk outlook, the US elections campaign and the tough rhetoric from President Trump could exacerbate tensions with China, while the equally hawkish tone from the Democratic Party brings new policy uncertainties to the bilateral relationship in a Biden-win scenario. This, combined with the ongoing health and economic crisis, is potentially conducive to geopolitical stress and national instability within emerging markets. Authoritarian leaders are threatened by domestic discontent and may try to “act” before the US elections to consolidate power or advance geopolitical objectives.
Amundi remains cautious on emerging market equities. We favour countries in Asia (South Korea, China) as they proved to be the first ones to navigate out of the pandemic. We like some inexpensive Europe, Middle East and Africa countries and/or those with good dividend yield prospects (Russia, Poland). At the sector level, we recommend a balance between growth and value areas, with selectivity in discretionary, industrials, materials, tech and IT.
Sue Trinh, senior macro strategist
Manulife Investment Management
We believe the US elections will inject much more volatility into the markets than the polls suggest. One of the key reasons is that there are significant measurement errors and sampling biases in the reported surveys. Even at the best of times, the US elections can introduce policy uncertainty, accelerating some decisions and delaying others. In the current environment, the risk of sudden policy shifts is even greater than the typical election years.
The key policy changes most relevant for Asia under different US presidents relates to trade and foreign policy, but the mood across the aisle is in favour of more action, not less. The risk is that it devolves into tit-for-tat tussle across all domains that develops its own momentum. This poses a significant risk for Chinese economic growth.
Among major emerging markets, China, for example, stands out in that it maintains a degree of control over its economic outcomes, thanks to the government’s tight grip on the economy. Across emerging-market equities, we see varying and potentially volatile speeds of growth, resurgence and recession through at least the rest of this year.
As investors, we’re monitoring the situation carefully to gain exposure to those companies that we believe present resilient growth opportunities. We continue to find many of these opportunities in industries that are at the forefront of today’s structural growth trends, in the relatively strong emerging markets concentrated in north Asia.
Andy Wong, senior investment manager, international multi-asset team
Pictet Asset Management
Pictet’s focus continues to be on long-term secular themes or industries that have strong underlying support but keeping in mind risks that could arise from the results of the election.
This time around, volatility may be higher post-election instead of pre-election. With the current political environment and the absentee ballot count, both sides of the political aisle seem to be preparing their voters for a potentially “unfair” election.
Such undermining of the legitimacy of the election, and the unfortunate passing of associate Supreme Court justice Ruth Bader Ginsburg, bring about further uncertainties and fissure, extending volatility well into the after-election period. As a result, emerging market assets could be out of favour in the run-up to the election.
Investors would likely look for hedges and stay closer to home markets, where there is more familiarity. This could reduce appetite for emerging market assets in the near term.
David Chao, global market strategist, Asia Pacific (ex-Japan)
Invesco
The 2020 US presidential election is just five weeks away, yet we have long said goodbye to a typical US presidential election year. Although the general risk premium remains subdued, I expect volatility to rise as we head closer to November 3.
What markets are underappreciating, is that this presidential election outcome will most likely be very different than previous ones. Despite Biden’s lead in the polls, market participants should not assume a decisive victory for Biden.
A disputed election will initially put downward pressure on the US dollar and global stocks; however, it would then be likely for the Federal Reserve to intervene with some extraordinary actions, such as temporarily cutting the policy rate to below zero or announcing a large-scale asset purchase plan to stabilise the capital markets.
Ahead of the election, emerging market Asia stock investors should consider diversifying their portfolios to include regional government bonds and investment grade credit as well as safe-haven assets.
Emerging market Asia equities should strengthen into the year-end as the election overhang is removed and investors refocus on fundamentals, such as an improving economy and a likely Covid-19 vaccine in 2021. I continue to be positive on EM Asia equities, particularly China A-shares as the region demonstrates its ability to contain the Covid-19 and experiences a modest economic recovery.
Brexit uncertainty, escalating Covid-19 cases in Europe, a weakening US dollar due to continued fiscal stimulus bazookas and the Fed’s continued dovish monetary stance, should also help gravitate capital flows to the Asia Pacific region.
Marc Franklin, head of flexible multi asset
NN Investment Partners
The US Presidential election represents one of the most binary political events globally of this century so far. On the one hand, you have the incumbent President Trump, who wishes to pursue an America First, deglobalisation agenda with a domestic policy agenda focused on support for US businesses via fiscal and regulatory measures.
On the other hand, you have US Democratic Party nominee, Senator Joe Biden, whose outline policy agenda focuses far more on the socio-economic challenges facing the US, especially income and wealth inequality, (which has implications for the US corporate landscape), and who is more inclined towards a globalisation stance.
Given the binary nature and limited predictability of the result, we would advocate a balanced positioning across investment themes. Sectors such as defence, healthcare and financials would face very different policy and regulatory backdrops depending who is the winner of the election.
As such, it is now about avoiding high risk in areas of the markets with this coin-toss outlook. Moreover, we would advocate a broadly conservative stance in terms of the overall level of risk in portfolios in the near term.