Published : 4 years ago, on 16/12/2020

By Fran Troskie, Investment Research Analyst at RisCura

The long-awaited United States election was hotly contested and the run-up to it was marked by elevated volatility in global markets. News of President-Elect Joe Biden’s victory set off a relief rally with both developed markets (DM) and their emerging market (EM) peers rising sharply during November. Global equities had gained more than 13% and emerging markets more than 10% in US Dollar terms during the month to 25 November. The initial euphoria may not last, but there are a few key things that we take away from Biden’s victory.

President Biden is likely to take a more considered, multi-lateral approach with respect to addressing pressing matters. These includes the uneasy relationship of developed markets with China, international trade and climate change. However, some things are expected to remain substantively unchanged. The issue of China is an interesting one.

While Chinese President Xi Jinping has openly welcomed the exit of the openly antagonistic Trump (who was known to refer to COVID-19 as Kung Flu), Biden will be no pushover. A major highlight of the Trump administration was its increasingly confrontational relationship with the Eastern superpower. The tone may change under Biden, but the substance is likely to remain the same. This is because one of the few beliefs that is shared across the US political spectrum is the fundamental threat posed by the rise of China. However, Washington is likely to seek greater alignment with its political allies against Beijing. For example, it may continue to apply pressure to its allies to exclude Huawei from their 5G mobile network plans.

Fran Troskie

A telling sign that the rhetoric against China is likely to remain substantively the same is the Chinese “poison pill” clause in the US trade agreement with Canada and Mexico still stands. It allows the US to withdraw from the agreement if either of its partners signs a trade deal with China. Overall, however, the Biden administration is regarded to be less isolationist and more amenable to trade. The more methodical approach to trade may also be successful in ultimately decoupling the US from its heavy reliance on Chinese supply chains. The impact on the long run performance of the Chinese economy is difficult to gauge. China’s economy has been the first to recover from the effects of the pandemic, illustrating quite clearly that its economic growth is largely generated from within. China’s economic growth has increasingly been driven by domestic consumers as opposed to exports to the rest of the world. Irrespective of the election outcome and the policy environment that follows, China is likely to remain a hard-to-ignore investment destination.

Trump’s obsession with bilateral trade deficits and his perception that the European Union takes advantage of the US, led to his use of national security concerns as a reason for levying tariffs on EU steel and aluminium exports. The EU’s response has been muted, striking mini-deals to avoid further escalation but largely adopting a wait-and-see attitude in the hope that a more amenable candidate would replace Trump. However, the reality is that Biden’s campaign also heavily featured the “Buy American” rhetoric. Moreover, trade policy is unlikely to be a top priority for an administration that is tasked with mopping up the economic and humanitarian fall-out of the COVID-pandemic. Be that as it may, the new administration creates an opportunity to reset the EU-US trade relationship. And the EU, no doubt, welcomes a return to more traditional and predictable policymaking, as will global investors. The UK maybe a different ball game with Brexit threatening the border with Ireland being a major problem for Biden who is of Irish descent.

One thing that the Biden presidency has not changed, is US monetary policy, and this is arguably one of the key drivers of financial markets. With the US economy struggling to regain its footing, Federal Reserve Bank officials have clearly telegraphed their intention to keep interest rates at historic lows for at least three more years. This really helps Emerging Markets manage their debt servicing costs and focus more on the impact from COVID.  The Fed’s long term move toward an Average-Inflation-Target has the potential to lead to a sustained period of capital flows to Emerging Markets. And Emerging Market valuations, which have been decimated by COVID, are looking particularly attractive.