Market optimism towards President Trump’s expectations of tax cuts, infrastructure spending, and deregulation could come under pressure should party infighting and opposition persist.
Global equities rallied following his election on anticipation that a Republican controlled White House and Congress could flawlessly push forward a pro-growth agenda.
Risky assets that have benefited from the Trump reflation trade seem likely to experience a correction as valuations have become stretched while earnings reflect a sluggish domestic economy. However, regardless of the impending overhang in the White House, there is still a case to argue that the outlook for Asian equities should remain attractive.
For 2017, expectations for a recovery in China’s economy had been seen as the second pillar to drive global growth alongside the renewed investment cycle in the US. Beijing implemented politically difficult supply side reforms while infrastructure spending spurred commodity prices higher. More importantly, a pickup in domestic activity reassured investors that economic data was transitioning from quantity to quality. China’s declining trade surplus with regional markets suggested that more imported goods were used for final consumption and not re-exported. Pickup in outbound tourism flows into ASEAN exemplified the economic shift towards experience consumption, while strong demand for e-commerce services was evident in Tencent’s first quarter results.
Better quality economic growth matters for Asia should US economic data begin to disappoint. Rising intraregional links and multilateral trade act as policy fulcrums, particularly as Asian economies have incrementally become more aligned to emerging market demand. President Trump’s foreign policy towards Asia has taken a big step back from his campaign promises. He has reversed his decision to label China as a currency manipulator, maintained military alliances in South Korea and Japan, and refrained from trade protectionist policies. All of these could reflect his need to reposition himself after demonstrating an impractical choice to withdraw the US immediately from the Trans Pacific Partnership upon taking office. Were President Trump eventually to implement any protectionist policies, this decision would prove to be quixotic and likely to achieve the opposite effect by generating higher costs from the disruption of supply chains and production inefficiencies.
Christopher Chu - Fund Manager Asian equities - Union Bancaire Privée (UBP)