(Bloomberg) — Investors inured to years of Sino-American trade spat seem willing to brave the risk of even higher tariffs following the US presidential election, and are favoring Chinese assets on bets for more stimulus.
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Whether it be Donald Trump or Kamala Harris as the new US leader, global money managers expect escalated hostility toward China. But rather than shun Chinese assets altogether on that prospect, they are banking that Beijing’s policies will continue to support stocks, especially those listed on the mainland.
A dovish central bank is also seen as a boon for local government bonds. The mood though is less sanguine when it comes to the yuan, as monetary easing to offset any post-election headwinds has the potential to weaken the Chinese currency.
The dominant view is that another term for Trump, who is advocating a 60% levy on all Chinese imports, will be overall more negative for the Asian country than a Harris win. Still, there’s less fear of a market shock akin to that seen when the Republican won in 2016. Trade wars are no longer a novelty, and investors have been steadily de-risking from China as geopolitical tensions simmered under the current administration.
Investors are also well aware that the MSCI China Index almost doubled during Trump’s term but is down more than 40% under President Joe Biden so far, highlighting how a myriad of factors including China’s regulatory crackdown has affected market performance.
“Policy stimulus is more important for the Chinese economy and stock market than the US election in my view,” said Jian Shi Cortesi, a portfolio manager at Gam Investment Management in Zurich. “The Chinese government has more policy measures prepared to respond to potential trade measures if Trump wins.”
A neck-and-neck race between Trump and Harris less than two weeks into the election is making it hard for funds to position in anticipation of the results, and explains their greater focus on China’s policy signals.
Buying Chance
Chinese stocks have seen a dramatic revival since a stimulus blitz in September, with the CSI 300 Index up more than 20% since last month’s low. Jefferies and M&G Investments are among those that believe an election-driven selloff will be a chance to add Chinese stocks.
“If Trump gets elected you would have volatility, particularly around Chinese equities,” but some of the negative impact can be balanced out by forthcoming policy support, said Fabiana Fedeli, global chief investment officer for equities, multi asset and sustainability at M&G. “If anything, if we see some big declines, we’ll probably use it as an opportunity to buy.”
Many investors say shares listed on the mainland will be better insulated from election swings than those trading in Hong Kong or the US — where foreign access is easier.
“Policy impulse in China is very strong and the election shouldn’t affect a lot of these, particularly the sort of high quality state-owned enterprises, high dividend names,” said Jon Withaar, head of special situations for Asia at Pictet Asset Management.
Tariff Threat
An analysis by Bloomberg Economics shows compared to 2018-2019, when Trump’s tweets on trade and tariffs sent shock waves through global financial markets, there’s less such correlation now.
Back then, “the world was integrating and so tariffs and policy out of the US became a bit of a shock not just to investors but also to companies in the region,” Andrew Swan, head of Asia excluding Japan equities at Man Group, said in a Bloomberg TV interview. “The world now understands we are living a different sort of geopolitical landscape.”
To be sure, exports have been a rare bright spot as China suffers a slowdown in domestic demand, meaning trade tensions can be a bigger economic headwind than in the past. The country is more vulnerable to tariffs than it was in 2018, according to TS Lombard, and a Trump victory may delay Beijing’s stimulus as it opts to keep powder dry until there is clarity on US policy.
Harris’ campaign messaging suggests that, while she won’t go easy on China, she sees no upside in a greater rupture between the world’s two biggest economies. She has criticized Trump for starting a trade war and likened tariffs to a “Trump sales tax” that would raise prices across the board for middle-class families.
Manulife Investment Management sees onshore government bonds and dollar notes issued by SOEs as attractive, expecting the People’s Bank of China to remain dovish.
“China may let the yuan weaken to some extent to mitigate negative impact on exports” if Trump wins and imposes higher tariffs, said Kiyong Seong, lead Asia macro strategist at Societe Generale SA. “In turn, it will create a larger room to cut policy rates and allow China rates to decline — so a bullish case for China bonds.”
Short Yuan
Currency traders are largely bearish on the yuan in a Trump win scenario, while expecting a rebound in the case of a Harris victory. The yuan slumped to its weakest in a decade in August 2019 as the trade war escalated, but ended Trump’s term about 6% stronger than at the start.
The dollar has been gaining this month as the odds of a Trump presidency fueled bets on higher inflation and elevated Treasury yields.
“Increased risk premia over tariff uncertainty should strengthen the dollar and the offshore yuan is likely to be the most impacted,” said Chidu Narayanan, head of macro strategy Asia-Pacific at Wells Fargo Securities Singapore. The firm’s position has been tilted toward a stronger dollar versus the yuan since late September, and is also long on the pair’s volatility, he added.
–With assistance from Abhishek Vishnoi and Joanne Wong.
