(ATF) The most direct effect of the recent presidential election in the United States is that Joe Biden’s administration is going to be much more cooperative and multilateral, with less confrontational trade policies and a reduced use of tariffs. There will be an overall improvement in trade relationships with China, even though this does not mean that all protectionist measures will be off the table.
The second effect is linked to the divided government, with a Republican Senate and a Democratic House of Representatives: fiscal stimuli are likely to be less than what was promised before. However, as long as a Biden administration implements a policy of fiscal expansion, which I think it will, the results are going to be positive for emerging economies, EM debt and more broadly for risk appetite.
The fiscal package and acceleration of economic recovery in the US over the course of 2021 will likely lead to a softer dollar, one of the main drivers of emerging markets (EM) strength. However, because we are in a pandemic environment, amidst a very challenging macro environment, we favour a more nuanced approach to EM investing. We are very mindful of being on top of idiosyncratic developments as there will be a lot of discrepancies and differences between markets, regions and industries.
On top of US elections, there are three main factors that investors need to consider when looking at emerging markets: how badly each country is affected by the pandemic; monetary and fiscal policy space available to fight the pandemic’s effect on the real economy; and whether there are macro and idiosyncratic vulnerabilities in the country in question. There is a fourth factor, cutting across the other three, which is how Biden will drive foreign and trade policies.
At the regional level, Asia is leading the global economic recovery and North Asia and East Asia are guiding the recovery, with South Asia lagging behind. We expect to see a global recovery led by China in 2021 which is likely to spread to other Asian countries. Biden is expected to be much more cooperative compared with the Trump administration, fostering optimism for an Asian recovery.
I am positive on China, South Korea, Taiwan and Vietnam, all of which have close ties to the most resilient sectors of the mainland Chinese economy. One of the reasons for optimism, in addition to a more open trade stance from the US, is that this region has already dealt with Covid-like disease spreads before, and it is now capable of implementing tracking systems, with mass compliance on lockdown measures.
In this environment of a cyclical recovery and Biden presidency, the Chinese yuan is likely to remain strong. Some currencies with a high beta to the yuan are the Korean won, the Malaysian ringgit and the Taiwan dollar. Those will also benefit from Biden’s election and from the economic recovery in China, providing a good outlook on the performance of local currency debt. While there are some EM bright spots, investors need to be mindful of the differences and discrepancies between markets, regions and industries.
# Lale Akoner is a market strategist at BNY Mellon Investment Management. Her responsibilities include contributing to the firm’s knowledge platform through analysis of global investment trends, market activity, and economics. She previously worked at Carnegie Mellon University’s Tepper School of Business, conducting research in empirical and quantitative finance. A native of Turkey, she obtained a bachelor’s degree in economics from Bilkent University, a master’s degree in economics with concentration in macroeconomics from Yale University, and a master’s degree in finance with concentration in financial engineering from Carnegie Mellon University’s Tepper School of Business.