‘America First’ may affect viability of offshoring model: Rainer Michael Preiss8 min read . Updated: 10 Feb 2017, 01:24 AM IST
The Taurus Wealth Advisors executive director on possible impact of Trumpnomics on Asia and Donald Trump administration's search for new allies in Asia to counterbalance the rise of China
Singapore: India could benefit from the Donald Trump administration’s search for new allies in Asia to counterbalance the rise of China, says Rainer Michael Preiss, executive director, Taurus Wealth Advisors Pte. Ltd.
“A tightening of relations with India is something that was already accelerating under Barack Obama, whose administration saw the world’s biggest democracy as a counterbalance to China’s rising power. Trump may take the relationship further," Preiss said in an interview. Edited excerpts:
Asia’s economies have been built on trade. What impact will protectionism in the US have on countries in the region at a time when local demand has failed to pick up?
The possible short-term impact of Trumpnomics is negative on Asian exporting countries, but the longer-term impact is expected to be positive as it will lead to more domestic consumption-focused growth and further give rise to the local service economy.
The major effects on emerging markets (EM) of a Trump presidency are trade protectionism and a realignment of US geopolitical alliances.
On trade, Trump is unlikely to reach the point of imposing tariffs, but will likely use threatening rhetoric to achieve some results.
Russia and the Russian ruble and Russian equities stand the most to gain geopolitically, with sanctions likely being eased in 2017.
The US relationship with China is the most critical to watch, with the potential for damaging tit-for-tat tariffs and geopolitical maneuvering as China looks to take advantage of a shift away from the Trans-Pacific Partnership to cement its regional power.
Clearly, China stands out as the most exposed to this threat. China exports about $500 billion of goods to the US each year, and the annualized trade deficit between the US and China stands at well over $300 billion.
The designation of currency manipulator derives from the 1988 Customs Bill, under which the US treasury department is required to review each of the major trading partners of the US, and determine if they are manipulating their currencies in order to gain an unfair trade advantage.
Trump has stated that China is a “manipulator, grand master level", and that he intends to impose 45% tariffs on Chinese goods.
Steady economic growth and financial stability are top priorities for Beijing as the country focuses on international politics and the new Trump world order.
The question for investors in Chinese equities is whether this year will see a further rebalancing of the Chinese economy towards consumption and away from investment and exports.China’s economy is expected to continue to grow by 6.5% according to official figures and while hardly stellar compared with the past, this should be acceptable to Beijing.
However, it has to be pointed out that even this level of growth is being paid for with increasing financial leverage: credit expanded by 15.4% last year. The quantity of growth in China is falling and so is the quality of Chinese GDP growth. In India’s case one could argue the opposite is happening, GDP growth is rising and so is the perceived quality of growth.
The timing and magnitude of Trumpnomics will be dictated by the legislative and political realities of a Republican Congress averse to unlimited deficit spending and a 4.6% unemployment rate could easily trigger wage inflation and thus a more aggressive Federal Reserve monetary tightening.
Trump’s economic agenda is actually negative for healthcare and US technology due to his administration’s determination to trim President Obama’s Affordable Care Act as well as for industries like technology that depend on global talent.
A hallmark of the Trump reflation trade was rising rates and rising stocks. Simultaneously, we saw a strong positive correlation between rates and the dollar and also between stocks and the dollar. That’s the “reflation trinity" as macro strategists like to call it.
The risk and the worry in the market going forward could be that a sharp repricing of yields—i.e. a bond selloff—causes stock and bond correlations to flip positive—i.e. bonds and stocks sell off together. This would be the virtuous Trump trade going into reverse or at least become fatigued.
The Dow hit a historic high of 20,000 the week before last. In response, Trump tweeted “Great!" a description that sounds contradictory to his campaign message that the stock market is a “big, fat, ugly bubble.
The only thing that looks good is the US stock market."
The question for investors this year is whether it’s a really a bubble and whether investors are too complacent and whether a reality check will come.
In this current global scenario, will you advice any of your clients to buy Indian IT stocks? Trump’s words and actions have unnerved India’s biggest export industry—IT services.
President Donald Trump’s ‘America First’ goal could affect the viability of the offshoring model adopted by Indian software companies. As such the Indian IT industry must adapt to the new geopolitics and diversify its business model. United States visa challenges are not going to go away easily and will continue to be a challenge for Indian IT companies. American immigration restrictions are the main source of India’s vulnerability.
Again, what is your take on the impact on India pharmaceuticals, considering that Trump has vowed to force the US drug industry to produce at home and cut prices?
Same as the IT industry; it might lead to a refocusing of the business model and overseas sales distribution.
Indian pharma industry impact of Trump measures lacks clarity and we don’t have many comments nor opinion on this.
What are your views on the current state of the Indian economy? Outside Trump, what are the concerns? Does India’s economy need a fiscal stimulus?
India as country could benefit from the new geopolitics as the US under the Trump administration is looking for new allies in Asia to counterbalance the rise of China. India could be such an ally.
A tightening of relations with India is something that was already accelerating under Barack Obama, whose administration saw the world’s biggest democracy as a counterbalance to China’s rising power. Trump may take the relationship further.
Modi is likely to increase defence spending along with other stimulus measures. Demonetisation could over time actually lead to increased, rather than reduced, government revenues that could be spent on defence and infrastructure improvements.
Can fiscal policy play a constructive role as a tool to lift aggregate demand and inflation expectations in an environment where private sector demand remains soft?
Indian fiscal stimulus and a focus on infrastructure development could further boost Indian GDP growth.
Full-year 2017 India GDP forecast of 7.5% makes India the fastest growing major economy in the world as this year marks the 70th birthday since independence from Great Britain.
What are your views on demonetisation—is it short-term pain for long-term gain?
Demonetisation has led to short-term uncertainty and market upheaval. The optimistic view of demonetisation argues that it helped leapfrogging the industrial revolution and landing in the data-driven age and preparing India for the fourth industrial revolution.
Will India likely outperform emerging markets in 2017? Will India be among Taurus’s top picks in an EM context?
Taurus family office is “overweight" on Indian equities and we continue to expect India to be a stock picker’s market. The long awaited goods and services tax (GST)...will tear down internal barriers to commerce and will help to balance state and central budgets while reducing costs to business.
India’s valuation premiums have come down a bit—has this got equity investors excited?
In a low-growth world, strategic asset allocation calls for investing in secular growth stories.
India is enjoying sustained economic expansion that merits higher valuation and multiples for Indian equities in our view. Foreign investors often have a sense that India could do better if FDI (foreign direct investment) was stronger and infrastructure better. Hence initiatives for fiscal stimulus will be watched by global investors.
How would you rate the Narendra Modi government on reforms delivery so far?
Prime Minister Modi has achieved positive momentum and structural change in India. Part of the challenge is that the coalition government dominated by the Bharatiya Janata Party under Prime Minister Modi lacks a majority in the upper chamber and hence it is limiting if not partly undermining its ability to implement its economic programmes.
If the Modi government reforms can reduce, if not abolish, internal contradictions, India can firmly be on the path to prosperity.
Further reforms are expected and will proceed in our view. A nationwide sales tax is expected in 2017 and bankruptcy laws are being rewritten.
For the last two years India’s economy has smartly outpaced China’s in growth and will do so again in 2017. Its population is growing faster too and as China’s population ages, India will continue to enjoy the demographic dividend of a swelling number of workers with relatively fewer dependents to support.
What are your favourite bets in Asia at the moment?
Singapore equities and local REITs (real estate investment trusts) offer attractive value. The slump in world trade, the Darwinian shakeout in the offshore rig construction market (Keppel is South-East Asia’s market leader in this sector), the malaise in the local commercial property market and a soft Singapore dollar all contributed to the dismal performance of the Straits Times index.
However, the Straits Times index is up 9% since the US Presidential election, a participant in the fabled “Trump rally".
The stock market was among the cheapest in South-East Asia at 10.4 times earnings while Singapore’s REIT sector was devastated by the surge in US treasury bond yields.
It is no coincidence that Singapore real estate trusts offer the world’s highest dividend yields at 7.5% and trade at just below book value.
True, Singapore’s GDP growth will not sizzle in 2017 and earnings growth is mediocre at 5%, yet there are tangible single stock investment opportunities on the Singapore Exchange (SGX).
While South-East Asia has been gutted by the 30% rise in the US dollar index since mid-2014, the region has far better growth metrics than China or even India in the short term.