U.S. election impact on APAC market

Executive summary:

Currency impacts and opportunities: The U.S. election outcome has triggered short-term strength in the U.S. dollar, affecting the AUD and NZD. This currency shift could offer buying opportunities as the USD is already overvalued relative to other currencies.
Trade and growth risks in Asia-Pacific: A potential increase in tariffs on Chinese imports poses a risk to the Asia-Pacific economy, impacting Australia and New Zealand's trade-dependent growth.
Bond yield divergence and fiscal stability: U.S. election-related bond yield shifts have made Australian and New Zealand government bonds comparatively attractive, offering diversification and potential outperformance.

Now that the dust has settled on the U.S. election, we turn our attention to what it means for the Asia-Pacific region.

As we noted from last week’s presidential result, the immediate reaction to the news was a move higher in the U.S. dollar (USD), bond yields and equities. The Australian (AUD) and New Zealand (NZD) currencies both sold off, along with the Japanese yen. Some of this move was retraced through the back half of the week, with the Australian dollar from last week’s presidential result ending the week close to flat.

In our watchpoints for the election we highlighted four key focus areas for the second Trump presidency – tariffs and trade policy, immigration policy, U.S. fiscal policy and reregulation. We think that the first and third are the most impactful to Asia-Pacific.

Trump has flagged 60% tariffs on all Chinese imports. While there is uncertainty around the scale and breadth of the eventual measures, we can lean on the 2018 experience for the kind of drag on growth this could have. That experience, scaled up to a 60% tariff on all products, would suggest a drag on growth of around 1.5% – which is very material, especially given that the Chinese economy has already been soft.

If this occurs, it could cause a drag on the regional economy. China accounts for a substantial portion of the exports of Australia, New Zealand, Japan and Korea. Additionally, the majority of trade in Asia is intra-region, so a slowdown in the largest economy has a big impact.

Some countries in Asia would see some benefits as market share shifts. For example, Vietnam has seen a significant amount of inbound investment since the first round of the trade conflict between the U.S. and China. However, the aggregate impact on the region will likely still be a negative.

The other channel of impact will be through the currency markets. Tariffs, all else equal, are USD positive. Of course, all else is not equal in the real world but it does suggest the potential for a stronger USD. This is likely a short-term dynamic rather than longer term, as the USD is already overvalued. The weakness in the Australian dollar should be faded as interest rate differentials will improve in favour of the AUD over the next twelve months.

The final consideration is bond yields. As noted above, U.S. government bond yields have risen as the odds of a Trump victory increased and again when it was confirmed. Through this period, Australian and New Zealand bonds have moved higher in line with the U.S. – indeed, the spread between Australian bond yields and U.S. bond yields has widened.

Australian and New Zealand government bonds offer attractive value and will provide diversification benefits if we experience volatility in risk assets. Additionally, we don’t believe that either government faces the same fiscal challenges as the United States. For example, while the U.S. is expected to run deficits of 5-6% of GDP over the next five years, Australia and New Zealand are closer to 1-2%. This should mean that government bonds in Australia and New Zealand should outperform the U.S. if the market starts to focus on the fiscal outlook for the United States.

In conclusion, Trump’s second term is likely to see heightened volatility for the Asia-Pacific as tensions between the U.S. and China remain elevated and the threat of tariffs linger. Asian currencies may see some downside in the near term as the market starts to price in potential tariffs, but we think this could pose a good buying opportunity as the USD is already expensive. Finally, Australian and New Zealand government bonds offer attractive value and should outperform if U.S. bonds sell off further.