HONG KONG: Asia’s swifter exit from coronavirus lockdowns has helped it to suck investment funds away from other emerging markets.
Now Joe Biden’s US election victory may accelerate the trend.
Investors and analysts from State Street Global Markets to JPMorgan Chase & Co are predicting a Biden White House will take a softer stance on trade with Beijing, burnishing the appeal of north Asia’s export powerhouses just as risk appetite is on the rise.
While China, Taiwan and South Korea were among the first to shake off pandemic restrictions, many countries in Latin America, Europe, the Middle East and parts of Africa are facing risks of a new round of restrictions amid a resurgence in Covid-19 cases.
“President-elect Biden’s win has been embraced by markets as it provides a narrative of desire for reconciliation, diplomacy and more international cooperation, ” said Daniel Gerard, a senior multi asset strategist at State Street in Singapore. “Asia, particularly EM Asia, will be a strong beneficiary of the current environment due to its relatively better handling of the pandemic, its exposure to technology and recovering consumers, and a recovering global trade story.”
Asia has dominated flows to emerging-market exchange-traded funds this year, receiving US$8.4bil, most of which has gone to China and Taiwan, according to data compiled by Bloomberg. By comparison, investors have bought just US$671mil of funds tracking the Americas, while the EMEA region has registered outflows of US$736mil.
“The implications of a widening US deficit, possibly more predictable US foreign policy and lower bond yields is a weaker US dollar, ” said Kerry Craig, a global market strategist at JPMorgan Asset Management in Melbourne.
“When combined with the greater success in handling the Covid-19 crisis and the continued recovery in the global goods and manufacturing cycle, this bodes well for the markets that have performed well so far this year: South Korea, Taiwan and China.”
Relations between the US and China have deteriorated since Donald Trump’s election in 2016.
He waded into a tariff war, imposed restrictions on China’s leading technology firms, threatened to sever financial links, and closed China’s consulate in Houston. While relations aren’t expected to be as friction-free as in the past, a Biden administration could be more predictable and less overtly hostile than the Trump one has been.
“China’s markets and asset prices would likely benefit from lowered uncertainty, ” according to Citigroup Inc economists led by Li-gang Liu in Hong Kong. “Expectations of a partial removal of tariffs and a toning down of tech sanctions would likely boost business sentiment and manufacturing investment in China.”
The Chinese yuan, Taiwan dollar and South Korean won are all among the top five performing emerging-market currencies this year.
The US dollar-denominated bonds of China, South Korea and Taiwan handed investors returns of more than 5% this year, according to Bloomberg Barclays indexes. The stocks of the three north Asian nations are among 2020’s top performers, with returns of about 15% in dollar terms, while the benchmark MSCI emerging market equity index has risen more than 5%.
The successful development and deployment of a Covid-19 vaccine can test the allocations made to Asia amid the region’s relatively better handling of the pandemic, and benefit the wider emerging-markets space.
Still, when it comes down to fundamentals, Asia is the only region whose consensus earnings estimates have fully recovered from the Covid-19 shock and turned positive for the year, according to data compiled by Bloomberg. That has also left Asia’s developing countries with more expensive price-to-earnings ratios than other regions since September.
“Asia will continue to perform well, ” said Paul Sandhu, BNP Paribas Asset Management’s Hong Kong-based head of multi-asset quant solutions and client advisory for the Asia Pacific region. “Aside from the overall growth outlook in Asia being sound, the diversification trade where investors are shifting from more concentrated developed markets to more diversified emerging markets will continue.
“Asia being the most attractive of the emerging markets currently, it will see a substantial share of that flow.” — Bloomberg
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