- Market narrative is one of softening growth, inflation, and interest rates ahead.
- Under that scenario, Asian currencies should be supported and capital inflows ought to pick up.
- But with Donald Trumps’ election, inflation and rates may not come down as much as expected.
- Still, for Asia, trade, travel, and investment have upside in the near-and-medium term.
- China and India may have contrasting growth dynamic, but both will remain highly consequential.
Historical trends are breaking down in a swirl of geoeconomic fragmentation, fiscal dominance, and tech disruption. Asset markets are turning volatile adjusting to this new landscape.
Market narrative has been one of softening growth, inflation, and interest rates ahead. Under that scenario, Asian currencies should be well supported and capital inflows to the region ought to pick up.
But the election of Donald Trump as the 47th president of the US poses considerable challenges to this narrative. Now it looks as though inflation and rates may not come down as much as market pricing suggests, and there is some risk of financial instability. This would be particularly on the cards if growth and inflation prove to be higher than forecasted by Fed officials in recent months, and the central bank begins to walk back its guidance for many rate cuts next year. This would undoubtedly displease Trump, setting the grounds for a conflict between the President and the Fed, which is mandated as an independent body.
While the threat of higher tariffs looms large, for Asia, trade, travel, and investments have upside in the near-and-medium term. Asia’s strong ties with the US and China would survive Trump, we’re sure. The region’s openness to trade and commerce makes it more attractive to investors, especially as the contrast with an inward-looking West becomes stark. Exports will face more scrutiny, there will more regulatory headaches, but the region’s scale, excellence in manufacturing and logistics, strong corporate and public sector balance sheets will hold them in good stead during Trump 2.0. China would likely push for more stimulus to boost domestic demand. India will likely be a big beneficiary of China-plus-one dynamics, as will be the case for several countries in South-East Asia. This election marks a firm rightward shift of the US; Asia will have to learn to live with it.
On asset prices, the near-term outlook is clear. Near certainty of tariffs will push up the USD, and many export-oriented economies will see their currencies come under pressure. Heightened geopolitical uncertainty is bullish for gold. Same holds for crypto, especially as Trump has showed a great deal of support for Bitcoin. Energy prices, especially fossil fuel, will be dampened by Trump’s intention to boost production. Equities are likely to rally around expectations of corporate tax cuts and deregulation.
Then there is the fixed income outlook, which is likely to turn cloudy. Even exorbitant tariffs won’t make much of a difference to US fiscal revenues, while various tax cuts and spending plans Trump has talked about would push for a wider budget deficit. Rising long-term interest looks likely for the US, and by extension, the rest of the world. At the short end of the extension, some easing is on the cards in the near term, but the extent of cuts possible in 2025 is going to be under considerable uncertainty, in our view.
We expect Asia’s trend defying efforts to maintain open economies and good relationship with both superpowers to be hallmark of 2025. It won’t be easy, but we hope this region has the mettle to pull it off.
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