SINGAPORE (Reuters) - Asian bond investors must brace for more volatility at least through the first quarter of 2017 when they are likely get more clarity on whether U.S. President-elect Donald Trump’s policies will reflect his anti-globalisation campaign rhetoric, according to State Street Global Advisors.
“If Trump walks the talk, that can be pretty shocking,” Ng Kheng Siang, head of Asia Pacific fixed income, said at the Reuters Global Investment Outlook Summit. “There are some people who say don’t believe everything he says, don’t take him literally. But you have to take him somewhat seriously.”
Indonesia and Malaysia, which have seen some of the biggest capital outflows following Trump’s election victory, could continue to sell off
Fears that Trump’s surprise election win could hit trade-dependent countries have caused a sell-off in emerging market assets across the globe. Trump promised during his campaign to impose trade tariffs on China, renegotiate several trade agreements and scrap the Trans-Pacific Partnership Agreement.
”Exports have been slowing down for a lot of Asian countries,“ Ng, who helps manage $4.1 billion of fixed income assets, said. ”With TPPA, you have some gains, some losses there, but hopefully it would create more trade volume. That has been taken away.
“With the TPPA gone, you have a negative trade impact. It’s a setback for quite a number of countries - Japan, Malaysia, Singapore. While many of these countries’ domestic demand is slowing down, they’re looking for new growth ... the TPPA dashed that hope.”
These countries may now need to look to trade agreements within Asia, he said.
Expectations of faster growth and inflation in the United States due to Trump’s promised fiscal stimulus also propelled the dollar to a 13-1/2-year high against a basket of six major global peers on Friday.
The expected pick-up in inflation, rate increases from the Federal Reserve and the resulting strength in the dollar could see continued outflows from Asian markets, Ng said.
The countries to watch will be those that face pressures from their current account positions and fiscal deficits, and those with high foreign ownership in the local assets market, Ng said.
Thus, it was no surprise that Malaysia and Indonesia, with as much as 50-percent foreign ownership in markets, were among the hardest hit, he said.
“That can attract more significant outflows,” he said. “The kneejerk reaction needs to be handled very carefully.”
Malaysia and Indonesia’s exposure means that these markets remain vulnerable to further outflows if the dollar strengthens further, he said.
“With dollar strength coming on that strong, it means that central banks don’t have lot of room to cut rates,” Ng said. “If the monetary policy lever becomes less of the thing you can work on, you need to lean more on fiscal. It depends on whether you have the fiscal capacity to do that.”
Indonesia is in a better position to use fiscal measures to boost the economy than Malaysia, where Prime Minister Najib Razak may call snap elections next year, Ng said.
“In Malaysia, knowing an election may be coming, there’s also some expectation of expansionary fiscal policy. Potentially that can help to provide some short-term cushion. But again, they’re cautious that if they overspend, that may attract negative comments from rating agencies,” he said.
Even if the Trump risks recede, other events, including Britain’s exit from the European Union and the fallout from an Italian constitutional referendum in December, could take their place, Ng said.
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Reporting by Nichola Saminather; Additional reporting by Saeed Azhar; Editing by Jacqueline Wong