Biden Victory Gives Asian Assets a Chance to Shine
Japanese and Taiwanese stocks are reaching multidecade highs this week, as a rally in East Asia runs ahead of one in the U.S. Many Asian assets may be ripe for a period of outperforming their American equivalents.
As a signal of the way the wind is blowing, the performance this year of Japan’s Nikkei 225, the country’s best-known index, is now almost exactly in line with that of the S&P 500 in dollar terms. Japan’s more representative Topix still lags behind, but by a diminishing margin. Korean and Taiwanese stocks are running even further ahead.
The most obvious factor that may have changed in the wake of the U.S. election is trade policy, a shift that benefits not only Chinese companies, but any of their counterparties in tech and other supply chains. Honda’s stronger-than-expected results at the end of last week helped lift Japanese auto makers, but the limited prospect of aggressive new tariffs for the next four years undoubtedly helped too.
The recent updraft looks particularly promising for American investors, since any gains in Asian assets will be magnified by a weakening dollar.
With a divided government, the prospects for U.S. fiscal stimulus look bleak, meaning the burden of sustaining the recovery will likely fall even more on the Federal Reserve. All else being equal, lower interest rates for longer aren’t good news for the greenback.
Even Monday’s positive vaccine news was drowned out in U.S. markets by political developments: S&P 500 futures rose only to retreat to their pre-announcement level.
Developed East Asian economies also are outperforming Western peers on pandemic control.
On that note, it’s worth looking in particular at the equity market’s cyclical sectors, such as industrial, consumer discretionary and technology. MSCI indexes for cyclical sectors in Japan and Asia-ex Japan are up more than 10% in dollar terms in the past three months, running ahead of their European and U.S. peers even after Monday’s rally.
East Asia can benefit directly from Europe’s troubles, since American investors with a specific allocation to developed international markets may shift straight from the latter to the former.
Chinese equities have outperformed their U.S peers for the year, although investors may prefer markets less dominated by individual investors and less sensitive to political ructions. Chinese government bonds still offer value. The yuan continues to strengthen, and there are very few places left in the world where a bond maturing in 2023 offers a yield of almost 3%, with negligible credit risk and limited downside-currency risk.
Taken together, these three factors—trade, the dollar and the pandemic—could give a significant lift to many Asian assets. The region’s nascent, export-dominated recovery and developments in the U.S. put it in a good position going into the end of the year.