Sanisha Packirisamy, Economist (Momentum Investments)
Democrat candidate Joe Biden emerged as the winner in a highly competitive presidential election in the United States (US), which experienced the largest-ever voter turnout. With investors assuming fairly defensive positioning in the run-up to the momentous risk event, a relief rally followed the outcome of the election.
In response, the MSCI Emerging Markets (EMs) Index rose to its highest level in more than two and a half years on the assumption of more predictable outcomes on foreign policy, the prospect of reduced trade tensions, a likely weaker US dollar and an expectation of lower-for-longer interest rates, due to monetary policy having to do more of the heavy lifting should fiscal stimulus be curbed under a split Congress.
During November 2020, news of potentially viable COVID-19 vaccines further emboldened investors to increase their demand for riskier assets. The widespread distribution of an effective COVID-19 vaccine across EMs could improve the economic trajectory significantly, particularly for those countries hit more severely by the effect of social distancing (i.e. those highly reliant on tourism) or where the virus is not yet under control. However, large parts of the EM composite, including Latin America, India and Africa, are still likely to suffer economic repercussions from the pandemic. Rising concerns over fiscal sustainability, increased company liquidations, elevated joblessness and constrained credit growth to counter an uncomfortable rise in bad debts will delay the level of growth in these economies from returning to their respective pre-crisis pathways.
In certain respects, change is likely to be more measured on a global scale with the US still being governed by a president with a limited mandate. A divided Congress constrains the legislative agenda, which lowers the chances of bolder and more transformative scenarios from playing out. Also, the prospect of a disputed election outcome at the time of writing and strained interparty relations may hang over financial markets, given an already high level of economic and policy uncertainty prevailing in the US.
Nonetheless, a Biden administration against the backdrop of a divided government, is still likely to be incrementally more positive for EMs than the outcome would have been under a second term governed by the Trump administration. Biden is likely to rebuild multilateral coalitions, reversing the negative trend of his predecessor who threatened to pull out of international bodies, which led to a scaling back in the international role the US has played for decades. Biden also intends to return to
the World Health Organisation, recommit to the North Atlantic Treaty Organization, re-join the Iran nuclear deal and sign the Paris Climate Accord, which furthers the agenda on collectively addressing global challenges. Biden is also likely to increase America’s cooperation with EMs with multilateral frameworks. This increased level of cooperation is expected to lower disruptions to global supply chains, which would be beneficial for broader international trade and the outlook for EM growth in general.
While we do not expect a U-turn on US-China relations, we do expect the Biden presidency to take a more measured and less confrontational approach. Attempts to limit China’s commercial and military advancements will likely persist given bipartisan support. It is also possible that the Biden administration may seek allied support to push back more effectively against China’s policies. Existing tariffs on China could remain, but there could be a more ardent attempt to encourage structural changes from China and to diversify supply chains out of China to reduce risk for the US. There could also be less pressure applied to pension funds and institutional investors to avoid Chinese shares, and Biden may even seek areas of cooperation with China despite a tough trade stance.
Although Biden is unlikely to pursue a protectionist agenda against most other countries, those facing a more authoritarian approach or those with a poor environmental stance could see a souring of relations with the US.
Still, we remain constructive on EMs in the longer term given the fundamental drivers behind the EM composite. Younger demographics, the growing role of technology in supporting higher levels of growth and a significant potential for financialisation all bode well for economic prospects in EM in the longer run.
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