Asia's economies throw a 'Trump tantrum'
Fed's expected rate hike seen speeding the capital outflow
MAKOTO KAJIWARA, Nikkei Asian Review columnist
HONG KONG A surge in U.S. long-term interest rates, set off by Donald Trump's victory in the Nov. 8 presidential election, is causing economies in Asia to experience an exodus of investment funds. A U.S. rate increase, which the Federal Reserve is expected to decide on at the Dec. 13-14 Federal Open Market Committee meeting, will probably accelerate the money drain. While U.S. share prices are enjoying a rally, the dark side of the Asian economy, long concealed by massive monetary easing measures, is being exposed.
The development has been dubbed a "Trump tantrum," a term that is becoming the latest buzzword among Asian market players. The expression comes from "taper tantrum," the name given to a previous phenomenon that shocked global markets in May 2013.
At that time, then-Fed Chairman Ben Bernanke indicated the Fed would scale back its quantitative easing measures. He used the word "taper" to describe a reduction in the central bank's asset purchases. When the Fed buys fewer Treasury bonds and other financial assets, it causes upward pressure on U.S. interest rates. Investors had earlier shunned the low interest rates in the U.S. and put their money into emerging economies to pursue high returns, but Bernanke's remarks reversed the flow, sending the market into turmoil.
"Trump tantrum" is similar, in that rising U.S. interest rates were the starting point. The president-elect is proposing massive public sector investment and tax cuts. On the expectation of an economic recovery, inflation and larger bond issuance, yields on 10-year Treasury bonds that had stayed at the 1.8% level surged to above 2%.
Just as in May 2013, Asian emerging economies have been thrown into turmoil. Stocks and currencies are being sold as investors pull their money out.
The Institute of International Finance projects that net capital outflows from emerging economies will amount to $373 billion this year. The figure is smaller than the $739 billion last year, when investors were deeply concerned about the Chinese economy, but market worries after the Nov. 8 presidential election are reminding many people of last year's situation.
RATE HIKES This is the environment in which Fed Chair Janet Yellen and other policymakers will hold their FOMC meeting. Market players believe that in addition to the widely expected December rate hike, the Fed will need to raise the rate two or three times next year because public investment by the Trump administration is likely to raise prices. Asian emerging economies must be on heightened alert.
A warning by Christine Lagarde, managing director of the International Monetary Fund, is worth listening to now more than ever. "Investors look at the fundamentals of economies, look at the strength of government, look at the predictability of policies ... and decide to move in, to stay, [or] to move out." Lagarde said this in January 2014, a month after the Fed began to taper its bond purchases.
In the midst of the "Trump tantrum," investors are now starting to scrutinize emerging economies. They are focusing on three factors.
First is the ability to pay external debts. Many people may remember the so-called "Fragile Five," which refers to five emerging economies troubled by current account deficits and small foreign reserves, whose currencies were actively sold in 2013. India and Indonesia were the two Asian economies in the group.
Despite some degree of improvement, both countries still post current account deficits. Malaysia saw its foreign reserves fall by about 30% over the two-year period until 2015. Compared with other Asian economies, Indian and Indonesian stocks and the Malaysian currency are falling more steeply.
U.S. PROTECTIONISM The second factor centers on trade. Trump is leaning toward protectionism, having announced that he will pull the U.S. out of the Trans-Pacific Partnership free trade agreement once he takes office in January next year. A dense fog of uncertainty has begun to envelop countries that depend on exports to the U.S.
Most people are not aware that U.S. protectionism also poses a risk to countries heavily dependent on exports to China, because Trump's proposed policies are targeting Chinese exports. He has indicated that he will impose high tariffs on imports from China or designate the country as a currency manipulator.
Slowing Chinese exports will deal a blow to countries that export parts and other unfinished items to China.
A typical example is South Korea. Its exports to the U.S. accounted for only 13% of the total in 2015. When exports to China -- its biggest trade partner -- are added, the figure jumps to 39%.
China's economic development has helped South Korea and other Asian economies nurture their export industries. If the core of the Asian manufacturing supply chain stumbles, its impact will spread throughout the region.
M&A ACTIVITY The third factor is acquisitions. Asian businesses, especially Chinese ones, have been actively buying U.S. companies. Dealogic, which provides financial data analysis, says Asian companies' acquisitions of U.S. businesses amounted to $111.5 billion between January and November, and more than $60 billion of this was by Chinese companies. Both figures are record highs for a single year.
The targets of the buyouts are customer bases, advanced technologies and brand values. If Trump implements his "America First" policy, the protectionist stance will hamper acquisitions and force Asian businesses to revise their growth strategies.
An anti-foreign atmosphere is already spreading. In February, major Chinese semiconductor maker Unisplendour, a unit of Tsinghua Unigroup, gave up on forging a capital tie-up with U.S. hard drive maker Western Digital. The U.S. government has been screening foreign acquisitions of U.S. companies from the viewpoint of national security, and it is said to be the reason for the Chinese manufacturer's decision.
How long will the "Trump tantrum" last? Goldman Sachs says it's likely to be temporary. "We nonetheless see [emerging markets] as a beneficiary of better U.S. growth," the financial institution said in a November report to clients. Growth in the world's largest economy will trickle down to the rest of the world in the long run.
WARNING BELL However, investors remain concerned about Trump's policies and how other countries might react.
"U.S. policy priorities are widely expected to undergo significant changes as the incoming administration seeks to address voter concerns," the Institute of International Finance said in a report released in mid-November. "A warning bell has been sounded as measures of U.S. policy uncertainty surge to their highest level since 2013."
The Economic Policy Uncertainty Index is compiled in part based on the number of times leading media outlets reported on policy uncertainties.
Investors were shaken by unexpected risks this year -- first Britain's vote in June to leave the European Union, then the U.S. presidential election in November.
A Japanese proverb says that "what happens twice will happen a third time," warning people that bad things tend to occur repeatedly, so they should be fully prepared. The old saying reflects what investors are feeling right now.