Americans have voted to expel President Donald Trump from the White House. When Joe Biden is inaugurated in January, it should herald a rewarding time for money managers in the Asia-Pacific market, going by the history of Democrat presidents.
In the most precedent, that meant a 50 per cent rally in Asian stocks during Barack Obama’s first four years, and risk-on mode for regional currencies. Last week’s market reactions suggest traders are keen for the pattern to repeat itself. The Hang Seng Index capped its best week since June, while the Shanghai Composite Index completed its biggest rally in almost two months. The yuan finished at the strongest level since June 2018.
“There’s a relief rally, that the destabilising, unorthodox president Trump is likely to be gone, and markets are celebrating, particularly China,” said Matt Gertken, geopolitical strategist at BCA Research. “Chinese and Hong Kong equities should benefit from that positive outcome.”
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The Hang Seng Index and Shanghai Composite Index both surged 1.5 per cent at of 11.20am local time, optimism surrounding Biden’s presidency fuelling gains in risky assets across Asia-Pacific markets. The yuan advanced to its June 2018 high, while the dollar slipped against major peers.
US, China and Hong Kong stocks have outperformed under a Democrat president. While the S&P 500 index rose in eight of the past 10 presidential terms, the benchmark’s biggest gains came during the first four years under Bill Clinton (1993-97) and Barack Obama (2009-2012).
The Hang Seng Index surged 135 per cent during Clinton’s first term, coinciding with the first wave of initial public offerings of China’s state-owned enterprises in the city. It climbed 77 per cent during Obama’s first term, fuelled by extraordinary quantitative easing in the aftermath of the global financial crisis.
The Shanghai Composite Index fared better during Clinton’s second term (1997-2001). The gauge jumped 124 per cent, leading into China’s accession into the World Trade Organization in December 2001.
A Biden administration, by most accounts, is likely to focus on repairing ties with traditional allies and shifting away from Trump’s big-stick aggressive trade policy, according to Bank of Singapore. For China watchers, it should translate into calmer geopolitics, lower tariffs, wider market access, and peace dividend for risk assets.
“Although I don’t see a U-turn in US-China relations, a Biden presidency will certainly be more measured in its approach to China,” said David Chao, a market strategist at Invesco, which manages US$1.22 trillion of assets. “The shrill rhetoric that … has rattled markets will certainly dissipate.”
Investors are likely to switch out safe havens like Treasuries into equities as the political overhang is removed, Hong Kong-based Chao added, and the US dollar could weaken from here through 2021. The yuan, already 5 per cent stronger this year, can only get better, making a stronger case for A shares.
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This year, the Stock Connect’s northbound inflows have reached 640 billion yuan (US$97 billion), still a tiny drop in an almost US$10 trillion onshore market. They rose every day last week, though, in the longest winning streak in four months, according to stock exchange data.
Information technology and communication services onshore, a sector targeted by US sanctions, noticeably outperformed, Morgan Stanley noted in a Friday report. Telecom giant ZTE Corp rallied 19 per cent on Thursday in Hong Kong, and China Tower surged 5.5 per cent on Friday.
“Investors are hopeful about potential improvement in Washington’s attitude towards the sector,” said Kenny Wen, a wealth management strategist at Everbright Sun Hung Kai. Growth companies should keep outpacing beaten-down cyclical stocks, he said.
The road to the January 20 inauguration day, though, is still fraught with some hurdles. While recounts are unlikely to reverse the election outcome, legal challenges from Trump’s campaign await.
Biden, who has pledged to force China to play by international rules, could still also prove to be a tougher opponent than his predecessor to China, according to BCA’s Gertken. The president-elect could form a grand alliance with liberal democracies to contain China, and press President Xi Jinping on human rights violation and political reforms.
“It means you will get this initial phase where Biden is pursuing diplomatic outreach, and China is pursuing its new goals, and that’s positive for the ‘New China’,” Gertken said. “But then once we get into an environment where that international pressure starts to build again, China will be between a rock and a hard place.”
Tensions with China seem to resonate across the political divide, according to T. Rowe Price. Biden will maintain pressure on China to address concerns about intellectual property rights in the technology sector. But if volatility were to lessen, that could be a positive for technology companies that are perceived as having some exposure to trade tensions, sector strategist Ken Allen said in a report on Sunday.
With the so-called Blue Wave or Democratic sweep falling short of expectations, a Senate in limbo or a divided Congress could temper the size of the economic stimulus package, and deliver a smaller boost at just US$1.5 trillion, according to Invesco’s Chao.
“I think that investors will rotate from cyclicals/value back to growth and technology stocks,” he added. “Already we are seeing the VIX (volatility index) start to come off, which should benefit emerging markets, particularly EM Asia assets.”
BlackRock, the world’s biggest money manager with US$7.8 trillion under management, expects technology and health care companies, the quality factor and large caps to perform well under a divided government. Emerging market assets should thrive on improved trade sentiment, it said in a note on Sunday.
In the past, global value stocks have outperformed growth stocks by 3.3 percentage points on average in the six months following presidential elections, according to First Trust Portfolios. A replay of that is now remote, according to analysts including Wen of Everbright Sun Hung Kai.
For Pictet Asset Management, a member of Swiss private banking group with US$589 billion of assets, a Biden win with a split Congress is perhaps the “best outcome” for riskier asset classes in the medium term.
“Policymaking should become less erratic with Biden in the White House, which could reduce stocks’ risk premium over time,” chief strategist Luca Paolini wrote in a note published on Friday. “A Biden administration with a more conventional approach to international relations should also provide a boost to emerging market assets, in which we retain an overweight position.”