Is Asia Ready for Trump and ‘Brexit Times 10’?

 
 

Donald Trump has declared that his winning the U.S. presidential election would be a “Brexit times 10.” With financial markets in Asia and the world already rattled by the prospects of a Trump presidency, the region appears ill-prepared should the forecast prove accurate.

Tightening opinion polls ahead of Tuesday’s landmark election have produced a string of losses on global stockmarkets as investors ponder the previously unthinkable. On Friday, the benchmark U.S. S&P 500 index closed lower for its ninth straight session, its longest losing streak in more than 35 years, amid increased uncertainty over the election outcome that previously was seen favoring Democrat candidate Hillary Clinton.

“Investors are uncertain about the outcome of the election, and they have grown more uncertain since last Friday,” Walter Todd, chief investment officer at Greenwood Capital, was quoted saying by Reuters.

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Asian financial markets have suffered the fallout. Japan’s benchmark Nikkei Stock Average fell below the 17,000 level Friday for the first time since mid-October, while Hong Kong stocks slipped to a two-and-a-half month low. Singapore shares have fallen for six straight sessions, while Australian stocks fell again Friday to post their third week in the red.

According to Bloomberg data, the decline in Clinton’s lead over her Republican rival since the renewed email controversy on October 28 has hit Japanese and other Asian stocks along with the U.S. dollar and Mexican peso. In contrast, investors have flocked to “safe haven” assets including 10-year U.S. Treasuries, the Japanese yen, Swiss francs, gold, and silver.

“A Trump win would cause a bigger shock than the British vote to leave the European Union,” analyst Itsuo Toshima told Japan’s Nikkei newspaper, adding that the gold price “could rise $100 in a day.”

Heightened investor anxiety has seen the VIX volatility index rise above 20 for the first time since Britain’s surprise vote to exit the European Union, which was not anticipated by financial markets. Similarly, market expectations of a comfortable Clinton victory have weakened following the re-emergence of the email scandal.

“There’s a lot of uncertainty surrounding the U.S. presidential election, so global share prices will tend to be unstable for the time being,” Naoki Kamiyama of Nikko Asset Management told the Japanese financial daily.

Westpac senior currency strategist Sean Callow has suggested even greater volatility is ahead, should Trump win.

“The global economic and financial market response to a Trump win would be greater than for Brexit,” Callow was quoted saying by Business Insider.

“A Trump presidency would bring about the biggest changes in many decades in existing U.S. arrangements on everything from taxation policy, to trade policy, social spending, immigration, and geopolitics.”

Callow said the Australian, Mexican, and Canadian currencies would be hit, along with global equities and Asian currencies, while gold, U.S. treasuries, Swiss francs, and Euros would appreciate.

UBS adviser George Magnus has suggested bond prices could be hit too, with a “material repricing of bond markets” should Trump dramatically increase fiscal spending.

The momentum is toward “bigger deficits [being] permitted and the trajectory of [U.S.] federal debt over the next 10 years looks bigger — and it looks bigger under Trump’s plan than it does under Hillary’s,” he told Bloomberg News.

Negative Effects

Japanese brokerage Nomura Holdings has warned that Asia would feel the negative effects should Trump secure the keys to the White House.

“A Trump presidency would no doubt hurt Asia’s GDP [gross domestic product] growth and could ultimately drive cost-push inflation, impart smaller trade surpluses and looser macroeconomic policies,” analyst Rob Subbaraman said in the report, as previously quoted by Pacific Money.

“The knee-jerk reaction to a Trump victory by Asia’s financial markets would almost surely be to sell off as investors price in a greater risk premium to U.S. policy uncertainty, protectionism, and regional insecurity.”

Trump’s threats to brand China a currency manipulator and impose tariffs of up to 45 percent on Chinese imports would damage China’s economy, with the flow-on effects likely to spread across the region. Both Trump and Clinton have rejected the Trans-Pacific Partnership (TPP) agreement aimed at lowering trade barriers across Asia, while Trump’s plan to slash corporate taxes could see billions of dollars flow back to the United States from Asia.

The billionaire businessman has also pledged to tighten immigration controls, which could hit remittances from Filipino workers in the United States. According to Nomura, the United States currently hosts 35 percent of Filipinos working abroad, which account for around 31 percent of total remittances.

Subbaraman said the Philippines and South Korea would be Asia’s most vulnerable in economic and geopolitical terms, with India and Thailand the least exposed and China only facing a limited impact.

Despite Philippine President Rodrigo Duterte’s recent moves, the Southeast Asian economy has the biggest export dependency on the United States at around 15 percent of Philippine exports, followed by Thailand and Indonesia at around 11 percent and Malaysia and Singapore at less than 10 percent.

However, a stronger yen would batter Abenomics, damaging any prospects of higher imported inflation, weakening stock prices and hurting exporters’ profits. Japan and South Korea might also need to increase defense spending, should Trump follow through on warnings about making allies pay more for U.S. military protection.

Citi analysts suggest a Trump victory would cause a 3 to 5 percent drop in U.S. stocks, with emerging currencies set to slide and safe haven assets such as the yen and Swiss franc to rally. While the U.S. Federal Reserve would likely step in to reassure financial markets, increased political pressure from Washington could reduce the Fed’s ability to manage U.S. monetary policy.

Commonwealth Bank of Australia’s chief currency strategist, Richard Grace, said a Trump victory would put the world’s biggest economy on course for a new bout of inflation.

“His policies are very inflationary – they will mean a surge in the stockmarket, a surge in government spending, a surge in U.S. bond yields, and a massive surge in the U.S. dollar,” he said.

“Some of his policies will generate good, demand-pull inflation, driven by a massive increase in government spending, particularly infrastructure spending… The other part is massive cuts to the income tax rate, which would generate increased household spending, which represents 70 percent of U.S. GDP, and that would be welcome. But there’s other things such as an increase in tariffs which would be less welcome, causing cost-push inflation,” he said.

According to Grace, the result would be higher U.S. interest rates than currently expected. Stock investors would also repatriate funds into U.S. equities due to higher U.S. company profits, putting more upward pressure on the dollar. However, the picture could change within a year, he said.

“The initial 12 months would be very stimulatory for the U.S. economy, putting upward pressure on bond yields, the equity market, and U.S. dollar. But after 12 months, the higher interest rates and higher dollar would slow the U.S. economy, then U.S. long-term rates would begin to come down again and the U.S. dollar would come down,” he said.

Another issue is the composition of the U.S. Congress, with a Republican-controlled Senate likely to aid Trump’s agenda compared to one controlled by the Democrats.

The worry for Asia is that unlike Brexit, political changes in Washington have a far greater global impact.

“If you thought Brexit was a big event, [Britain] is 2 to 3 percent of global GDP. The U.S. is around 25 percent of global GDP,” equity strategist Greg Goodsell told the Australian Financial Review.

Early voting appears to be favoring the former U.S. secretary of state, with Hispanic voters reportedly backing Clinton in large numbers. But after the experience of Brexit, few will be relaxing anytime soon as the race for leadership of the world’s richest democracy goes right down to the wire.

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