As the clock ticks down towards Donald Trump's entry into the presidency, a Swiss bank considers what the impact could be on Asia, and explains its portfolio positioning in the region.

With US president-elect Donald Trump being sworn into office later this month, wealth managers are wrestling with the implications of his election, and the control in Congress of Republicans, for economics and markets. 

Daryl Liew, senior portfolio manager, Reyl Singapore, says the largest event shaping overall economic developments will be Trump’s policy, and that Asia’s principal worry is a revival of trade protectionism in the new Oval Office. He noted, meanwhile, that Asian markets sold off recently. As far as countries are concerned, he is keen on India, Vietnam and Philippines. 

To illustrate the point, in the final three months of last year, the MSCI Hong Kong Index fell more than 5 per cent (measured in dollars). The MSCI Emerging Markets Index of equities fell by 4.16 per cent, although over the year that index showed total returns (capital gains plus reinvested dividends) of 11.2 per cent. The MSCI World Index showed total returns of 7.5 per cent. Stock markets in the US have actually risen since the November 2016 election win for Trump, confounding some forecasts. 

One concern in Asia, Liew says, is that Trump makes good his threat to slap higher tariffs on countries such as China. “Asia growth has been driven by international trade and a move inwards to close off US borders will adversely impact regional growth. With the threat of trade wars brewing, one should be cautious on export and trade-related investments,” the fund manager said in a note last week.

“The death of the TPP [Trans-Pacific Partnership] is indicative of the current anti-trade sentiments in the West. These sentiments however are not shared in Asia, where leaders are focusing their efforts on another trade pact - the Regional Comprehensive Economic Partnership, which includes the ten Southeast Asian countries plus China, India, Japan, Korea, Australia and New Zealand. While the US is a significant loss, the RCEP nations have a collective population of over 3 billion and a GDP comprising about 30 per cent of the world’s total. Stronger intra-regional trade, driven by the growing Asian middle class, hopefully will make up for that which is potentially lost from the US,” he said.

Another cause for worry is whether the US cuts its military presence in Asia, following Trump’s calls for other countries to pay a greater share of defence costs.

“A withdrawal of US troops from the region could be destabilising, creating a security vacuum that could lead to rising geopolitical risks, especially when you consider the existing tensions in the South China Sea. It is worrisome that many Asia-Pacific nations are expanding their defence budgets, increasing the risk of a military conflict,” he said. 

“In fact, a US military withdrawal could be playing right into China’s hands, as China is more than willing to fill the vacuum of `Big Brother’. China’s recent initiatives - One Belt, One Road and the establishment of the Asian Infrastructure Investment Bank - have resulted in major commitments to various infrastructure projects across Asia. This is part of China’s strategy to increase its political and economic influence in the region. As a case in point, both the Philippines and Malaysian leaders recently visited Beijing and left clutching multimillion investment packages,” Liew continued.  

Liew also noted how the dollar has appreciated since Trump’s victory and could continue to strengthen if his reflationary policies take shape, as they will prompt the US Federal Reserve to increase interest rates faster than expected. “Weaker balance sheet currencies like the Malaysian ringgit and the Indonesian rupiah, which enjoyed strong gains in the first three quarters of the year, have suffered significant sell-offs.The Chinese renminbi has also come under pressure, though this is mainly due to dollar strength, as the renminbi has remained stable against the CFETs diversified basket of currencies,” he said.

However, Liew said there are limits on how much the dollar can rise because a strong dollar will hurt US interests, such as those of manufacturing firms in the “rust-belt” states.
 

Asset allocation
Liew said less developed Southeast Asian economies could outperform other countries in 2017 because they still receive foreign direct investment. Vietnam looks attractive, he said, because of how the government is privatising state-owned enterprises. He gives the case of Sabeco, a dominant brewer in Vietnam, which was recently listed; there are more IPOs of firms in the works.

Turning to the Philippines, Liew said the country looks reasonably valued following a large de-rating following the election of maverick president Rodrigo Duterte. Both Vietnam and the Philippines are slated to see gross domestic product expand 6 per cent in 2017, among the fastest growth rates in Asia.

As for India, Liew said the country is one of his firm’s preferred markets this year. In the short term, India’s economy has been hit by the government’s surprise move to outlaw high-value bank notes, but the associated sell-off in equities is a buying opportunity, he said.

“One of the advantages of India is that it tends to be largely uncorrelated to the other Asian markets, mainly being dependent on domestic growth rather than exports. There are also signs that Modi’s reforms are starting to get traction - the implementation of GST in April 2017 is significant and will improve business efficiency,” he said. (GST stands for goods and services tax, a sweeping reform designed to replace the existing indirect taxation of goods and services in the country.)

Liew adds that he sees more gains for the Japanese stock market. Equities in the country have benefited from the Trump win, he said, because of the fall in the yen exchange rate against the dollar. 

“This trend could continue into 2017 with interest rate differentials widening. Also, Japan doesn’t appear to be targeted by Trump on potential protectionist measures. Valuations for Japan are still looking reasonable, with further potential earnings upside as benefits from the weaker Japanese yen start coming through next year,” he said. 

He added: “28 January marks the start of the Year of the Rooster and hopefully the domesticated animal will be crowing about better days ahead in 2017. At least that could be the case for some parts of Asia."