Saturday, 21 July 2018

Here comes the Asian recession

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  • Jonathan Rogers
Under Trump, infrastructure will become the only show in town, says Jonathan Rogers

AND SO THE orange-faced candidate won. I watched the US presidential election unfold last Wednesday with friends in Singapore, flipping channels between CNN, BBC and Fox News, wondering all the way through why the updates on the electoral college tally were so slow. Surely it was too late to impact the polling booths?

The room was filled with Hillary supporters and every time there was a projection of the possible result in those faraway states, where the bulk of us watching will never taste the air of the American dream, there was a sharp burst of breathless analysis from the throng of spectators explaining why Clinton could win.

She didn’t, and, at a certain point during the early afternoon, hope gave way to recognition of the impending victory of Donald Trump.

As the zombie stares at the Clinton campaign headquarters radiated out in gobsmacked silence, the ticker at the foot of the television screen informed us that Dow futures were off 800 points. A real impact, then, of The Donald’s unfolding victory, but it wasn’t translated into price action during the actual trading session. The Dow ended up last Wednesday just shy of its all-time high, with banking stocks leading the surge.

But what does it all mean for Asia? Trump gave a speech at the New York Hilton not long after Clinton had conceded the election, which although well short of the oratory of a Kennedy or an Obama, contained a key message which will have ramifications for financial markets in the region: he’s going to spend on infrastructure.

Asia got that joke quite a few years ago and in many of its cities, the airports, underground transport systems and roads put the US to shame.

But where America leads, much of the world tends to follow, and so with that soundbite about infrastructure – even though it might be more about reprising Roosevelt’s 1930s “New Deal” than producing a global blueprint – Trump just set the agenda.

And US Treasury bonds reacted, reversing an initial yield compression on news of his victory, before selling off, for the worst price performance this year: the 10-year US Treasury bond added 11bp in a matter of hours, after Trump delivered his victory speech with its talk of infrastructure renewal.

IF IT WASN’T already, infrastructure is about to become the only show in town. And at the heart of Trump’s victory is the paradox that he does not believe that global climate change is a real phenomenon and that he will tear up the 2015 Paris climate change treaty, the details of which are currently being hammered out at the COP22 in Marrakech.

Infrastructure is more than just power production of course, but given the private sector’s push into renewable energy, I doubt that Trump’s agnosticism towards the Green agenda will last. He will eventually get on with the programme.

Then there are the competing merits of how business is done in Asia, the economic miracle of the past 40 years. Tax rates are profoundly low, which helps business and is at the root of the Asian miracle. Trump stares at a 39% effective rate of corporate tax in the US, and promises a 10% tax amnesty for hoarders of cash offshore in the hope that the US$2trn or more of company money stashed away outside America will be repatriated.

If it goes according to the script, the situation is profoundly inflationary. The 30-year bull market in US Treasuries is probably at an end, something which will be signalled next month with a rate rise from the Federal Reserve.

If it goes according to the script, the situation is profoundly inflationary

THE CHINESE RENMINBI would be my short trade of choice, if not the entire Asian currency complex. Trump seeks to impose tariffs on cheap Asian imports to protect the workers he identified as “forgotten” in his acceptance speech. So short Asian currencies, then, on a weaker long-term growth outlook.

The upward pressure on dollar interest rates will become acute over the coming months. For Asian enterprises which have borrowed at fixed rates and swapped to floating, that will hurt.

By extension, I believe from anecdotal evidence that a large swathe of Asia is already heading for recession, Trump or no. And the restructuring round has already kicked off, led by such an august arena as Singapore. To add to the ongoing pain, Trump’s presidency will put further pressure on strained Asian balance sheets as it ushers in the great credit market unwind.

However controversial his victory, it leads to the conclusion that for now, in the face of an inescapable approaching dynamic of reflation in the US and a consequent recalibration of long-term interest rates, cash is now king for players in the Asian capital markets.


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