What impact will polls and populism have on Asia?

Volatility is on top of investors’ minds as 2024’s election supercycle continues. Countries comprising 60% of the world’s economic output are going to the polls this year, with some already concluded.

But no election is more closely watched than the US presidential election, with its result likely to be deeply felt globally. We think there are three important areas to watch, particularly for APAC investors: 1) Imposition of tariffs; 2) fiscal support for green energy and mobility; and 3) fiscal spending.

Tar and feather: First, the imposition of tariffs. This is an area where US presidents generally have a high degree of autonomy. Should a Biden government prevail, we don’t expect major changes, as history provides a clue—for instance, Trump administration tariffs on China have not been repealed under Biden but neither have they been raised. The Trump camp is currently calling for at least 10% in tariffs for any country exporting to the US and 60% for China’s US exports, whereas under Trump 1.0, these tariffs were either not imposed or were lower.

Indeed, further technology restrictions on mainland China were not explicitly mentioned but remain a distinct possibility. If these materialize, it would benefit Taiwanese foundries and South Korean memory suppliers. We like these segments as they reflect the global semiconductor cycle rebound. In response, Beijing could restrict delivery of critical minerals, but it’s debatable if this could sufficiently deter US restrictions. Tighter restrictions in mainland China would also hurt most semi companies, but select companies working on mature node processes, especially equipment makers, may benefit from domestic demand and policy support.

Green light to red: Next, if a Trump government is in place, we think green energy and mobility-promoting policies such as the Inflation Reduction Act would be called into question, and fiscal support for green energy and mobility could be withdrawn.

That said, this might have less of an effect versus Trump 1.0 for China’s and Asia’s solar and EV/battery supply chains. On the car and battery side, Chinese producers are already effectively blocked via high tariffs and exclusion from consumer incentives. Chinese solar companies would likely see an impact if their production in Southeast Asia starts to be constrained under tariffs, yet this only accounts for about 10% of their export capacity. Indeed, the overarching issue we see here is current global overcapacity, regardless of US elections.

Fiscal largesse unlikely: Third, we’re watching closely if any US presidential candidate desires to revive large fiscal spending, following the uptrend in US debt-to-GDP levels in recent years. If so, higher yields could affect bonds and currencies (regional central bank behavior), as well as stock market valuations. However, potential resistance from Congress and the general public should render significant increases in budget deficits less likely.

Moreover, if Trump 2.0 occurs, the economic context will be different. Trump 1.0 took place when the US was in an early economic cycle, with rate hikes deployed due to rapid inflation. Now, the US economy is in a mid-to-late cycle, with moderating growth and inflation. The ability for fiscal stimulus looks more constrained now (fiscal deficit 6.4% of GDP, gross debt 124% of GDP) versus 2016 (fiscal deficit 2.7% of GDP, gross debt 105% of GDP), which limits the upside risk of US bond yields.

Overall, a potential Trump 2.0 doesn’t significantly alter our view for a gradual slowdown of the US economy and rate cuts from the Fed. Our view for medium-term USD weakness versus APAC currencies remains intact. To hedge against US-China trade tensions under Trump 2.0, we favor a short CNYJPY tactical position. The CNY came under significant selling pressure during the escalation in trade tensions between June 2018 and November 2019, which prompted a peak-to-trough decline in CNYJPY of around 15% during this period.