The global investment environment has changed dramatically only two weeks after the Nov. 8 presidential election in the United States.
Donald Trump’s policy direction has become a hot topic, and expectations have reached a peak even before he assumes office in January.
That has driven up US equities to record highs. Small and mid-cap stocks have led the rally as these firms are less affected by the strong dollar.
A tough stance on trade would drive up prices of imported goods. That would make local small and medium-sized corporates more competitive.
The S&P Small-Cap 600 Index has soared 20 percent so far this year, while the Russell 2000 Index has rallied 16.4 percent.
These benchmarks have gained for 12 straight days, the longest winning streak in 13 years.
Tax cuts are also widely expected, and regulations on the financial and oil sectors are likely to be relaxed.
The US financial index has swung back to positive territory, posting a 6.6 percent gain this year.
However, bond prices have fallen amid strong expectations of an interest rate hike this December.
Long-duration US Treasury yields rose along with the soaring US dollar index. As a result, bonds and currencies in emerging markets have plunged.
For example, a Hong Kong-listed company issued high-yield bonds in September at a coupon rate of 4.75 percent. Now it needs to pay 5.625 percent.
A tire manufacturer in Indonesia issued a US$500 million debt at a coupon rate of 7.75 percent. But the secondary market rate has soared to 14.534 percent.
In that case, companies in Asia and other emerging markets will be held back from issuing debt. Rising credit cost would slow down corporate investments.
In the meantime, capital outflow from emerging markets has worsened. Global funds have dumped US$11 billion of Asian stocks and bonds from Nov. 9 to 18.
India and Thailand have suffered the most, with heavy sell-off of stocks and bonds worth of US$2.9 billion and US$2.83 billion respectively.
Will the capital flight from emerging markets continue?
Trump, who has built a successful property business, would probably want to see things returning to normal with the central bank reducing its intervention in the markets.
He intends to cut corporate tax from 35 percent to 20 percent, personal income tax from 39.6 percent to 33 percent, and capital gain tax from 23.8 percent to 16 to 20 percent.
The tax cuts are expected to boost US consumption next year. And large infrastructure projects would be able to offset the negative impact of a strong dollar.
Infrastructure spending will benefit the property and logistics sectors.
If Trump rolls out his policies in an orderly manner and economic growth improves, financial and resources stocks would be the biggest beneficiaries.
This article appeared in the Hong Kong Economic Journal on Nov. 25.
Translation by Julie Zhu
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