Asia’s equity markets were among the worst hit after Trump’s victory in November.
Having risen as much as 15 per cent between January and October, the MSCI Asia ex Japan Index ended the year with a total return of just 5 per cent, as investment flows swung back to the US.
They did so because Trump’s promise to use fiscal measures to stimulate the domestic economy was seen as a positive for US investors, while his plan to take a more protectionist stance on trade was considered a negative for exporting regions such as Asia.
We think the reaction is overdone, particularly with regard to the likely impact on Asia of a US crackdown on trade.
Indeed, we see investment opportunities in Asia arising as a direct result of Trump’s policies, not all of which are likely to be totally effective.
Asian outlook remains resilient
Trump’s victory has, in fact, done little to change the fundamental outlook for Asian equities, in our view.
We expect earnings growth — which has outpaced the rest of the world in the last two years — to stay solid.
Commodity prices should continue to be relatively stable, and business margins should benefit from slightly higher inflation and a better alignment of supply and demand.
Still, Trump’s presidency will be something of a wild card. There are three different ways in which it could affect the region, in our view.
Each has its own time frame — and some surprisingly positive aspects as well.
Regional banks to benefit
The biggest impact in the short-term is likely to be through reflation.
Markets have quickly adjusted since the US election in anticipation of higher inflation, partly from Trump’s promise of fiscal measures, such as investment in infrastructure, to stimulate the domestic economy.
Markets and monetary authorities usually respond to rising inflation with higher interest rates.
Investors are now increasingly expecting more rate hikes by the US Federal Reserve, which in December raised the fed funds rate — the second increase in 10 years.
This, of course, is a positive for banks and other financial institutions, in Asia and elsewhere — and is one area in which active value investors can benefit as a result of Trump’s policies.
Our bottom-up research has identified several banks and insurers in Asia that are very attractively priced.
Silver lining for technology
The second investment opportunity is created by what we expect will be the limited success of Trump’s policy on trade.
The US is likely to make some well publicised moves against industries such as steel and auto exporters.
These industries, however, account for a relatively small proportion of Asia’s exports and such measures are more likely to hurt non-Asian countries such as Mexico (particularly in the case of autos and auto parts).
What about China? A broad-based US tariff on Chinese goods is unlikely, in our view, for two reasons: it would massively increase the cost of technology and other goods for US consumers (and hence be politically unpopular), and it could prove to be too complicated to implement effectively, given the complexity of modern supply chains.
Against this backdrop, we think relatively little of the campaign rhetoric will become policy.
Stocks of companies in industries such as technology — which were seen as potential victims of protectionism — could be less affected than expected today.
Geopolitical tensions: Risk or opportunity?
A third opportunity lies in geopolitics. It will take time to see how key issues unfold, such as Trump’s intention to downgrade the US’s role as global policeman, North Korea’s confrontational behaviour and China’s growing assertiveness in the South China Sea.
While these issues give rise to geopolitical uncertainty, they also create investment opportunities.
A reduced US economic presence in Asia would give more scope for companies from India, China and Japan to pursue their ambitions there.
Additionally, construction companies clearly stand to benefit from the massive infrastructure that China’s expansion in the South China Sea requires.
North Asia and cyclical stocks could benefit
On balance, we think a Trump presidency might not be as bad for Asian equities as widely believed.
If his fiscal policies work, they will be good for both US and global growth and that, combined with a reflationary environment and higher rates, should favour cyclical stocks.
Investors would feel less need for safety, so bond-like equities would probably underperform.
At the same time, growth would become less scarce, leading to resurgence in the value style.
If these trends play out, we think stocks with low price/earnings and price/book ratios, together with strong fundamentals, should do well — and these are abundant in north Asian countries such as South Korea, Taiwan and China.
We think that the potentially negative effect of Trump’s trade policies on Asia will be milder than most people expect.
While Trump’s presidency is likely to add political risk and uncertainty, forward-thinking investors in Asia can discover surprising beneficiaries across the region’s equity markets.
Stuart Rae is the chief investment officer Asia-Pacific ex Japan at AllianceBernstein.
