Please note that due to the (U.S.) Thanksgiving holiday, the next Asia Weekly update will be published on December 1, 2016.
Is the election of Donald Trump the latest example, following on from the Brexit vote and the success of Bernie Sanders and non-mainstream candidates in Europe, of a global trend in demagoguery and isolationism that will sweep all in its path, including the economies of Asia?
I doubt it.
First, a psychological observation: There is a tendency to see things in the context of your own country's experience and extrapolate that to others, even though they may be in quite different situations. For example, there seems to be a desire to see China's housing market in the same way as one looks at what happened in the U.S. However, they are in fact quite different.
Second, a personal bugbear of mine—there’s also the tendency to view developments in Asia as always being derivatives of what has happened in the U.S. But Asia is home to over half the world’s people. Its politics are determined at home, just as its economic growth is determined at home.
So, how to make sense of the recent shifts in political power? Well, I know how I see it. I try to understand the economic environment first. Then, I see if we have a roadmap that shows us where people's economic interests lie and whether that explains current political decisions. So here are my two assumptions: 1) the West is in a depression-like economy or what feels like depression because of the slow growth in demand and wages; Asia is still growing at a healthy clip, in nominal terms. 2) The General Theory, written in the 1930s by Lord Keynes, gives us a pretty good roadmap for understanding the forces at play.
And what are those forces?
Well, in a world of low interest rates, when central banks have given up on being able to stimulate demand, deflation (or disinflation) rules. Wages stagnate. Employment is lackluster. Without wage growth, people feel they are stagnating. And as low rates propel asset markets higher, the difference between the haves and have-nots, and the manual laborer and the equity owner, seem cut in especially sharp relief. In addition, the normal rules of economic policymaking are reversed—monetary policy takes a back seat to fiscal policy; protectionism supports demand rather than causing inefficiencies; productivity gains lead to unemployment rather than spurring growth. The government is forced to "socialize investment" because private enterprise will not invest at a high enough rate to secure full employment. This is the Keynesian playbook. You may or may not agree with it, but you can see in it key elements of policy shared by Trump, Sanders, Brexit supporters, and even Hillary Clinton. It can be seen in the trend of isolationist sentiments and stances against the Trans-Pacific Partnership, the North American Free Trade Agreement and support of massive infrastructure spending, and the key role played by the votes of the forgotten "manufacturing workers" in the U.S. election.
But then, there is no reason to suspect that these political trends of the West will be mirrored in Asia. For Asia has high interest rates and robust wage growth. Asia has room to further grow productivity. Chinese families are chasing their version of the American dream. Southeast Asia is embarking on a build-up of its manufacturing base. The middle class in Asia is growing and developing. In the Philippines, you may question how a leader like President Rodrigo Duterte came to power with populist policies, but his strongman style is not exactly a deviation from the likes of former rulers Ferdinand Marcos and Joseph Estrada. Surely, there are income inequalities in the region, but with growth spread across Asia’s classes and countries, the political strains, whilst not absent, are nowhere near as acute.
So, there is no need for Asia to have the same kind of political reaction; no need for it to react to protectionism by igniting a trade war; no need to abandon the traditional economic logic of raising productivity to spur growth. And by and large, Asian voters have put in place reformist governments intent on following these mainstream economic policies. Yes, there is the potential for U.S. and European isolationism to increase—perhaps the world will divide itself into blocs along these lines, leaving Asia as a distinct and separate bloc of capitalist growth. Perhaps this has consequences for how asset allocators might view the world. But it does little to undermine the basic view of what will drive the growth in Asian living standards—or how we will seek to invest in them.
Robert Horrocks, PhD
Chief Investment Officer