If Trump Punishes China, Investors Could Seek Safety in Myanmar

Financial markets in Asia didn’t fancy the outcome of the US election. Markets fell on the news of the Trump victory, and despite a rebound the MSCI Asia Pacific Index was trading close to a one year low last week.

Worst affected have been countries with a high proportion, close to 40%, of their sovereign bonds owned by foreigners – like Indonesia and Malaysia. And, while perhaps trivial, I have faced a setback as well.

The Friday after the result I had planned to lunch with an Asia fund manager in the City – the financial heartland of London – but our ‘pre-Christmas lunch’ was abruptly cancelled as he had an unexpected influx of clients’ trades to deal with.

Contrary to popular belief, life as an investment professional in the City is mundane; the days are filled with internal discussions, meeting companies, talking with analysts and reading research reports.

The presidential election scuppered this, or as my mathematically inclined fund manager friend put it, things “went non-linear.”

The first 100 days

Donald Trump will start his new job on January 31st 2017, leaving more than a two-month vacuum for investors to engage in speculations.

This is unfortunate. November through January tends to be the period that offers the biggest gains among Asian stock markets.

However, we should get ready to fasten our seatbelts for the first 100 days of his presidency. Any business management guru worth his or her salt will claim it is the critical period to undertake changes.

Businessman Trump is likely to adhere to that strategy, setting up February to May to resemble episodes of The Apprentice.

I am particularly keen to get updates or clarifications on a number of economic issues.

Prior to his election, Trump threatened to renegotiate the North American Free Trade Agreement (NAFTA), the trilateral bloc encompassing the United States, Mexico and Canada enacted in 1994. He claimed Mexico stole jobs from working class Americans.

In Asia, China was in the cross hairs. He talked about labeling the country a currency manipulator, slapping 45% tariffs on imports to stop the dumping of products such as steel and garments, and monitoring intellectual property infringements more thoroughly. He also pledged to stop the practice of US firms being forced to share cutting-edge technology in order to win contracts or maintain operating licenses.

Japan and Vietnam were singled out as having received unfair advantages due to currency devaluation. Trump also expressed reservations about two Asia-related trade deals. Firstly, he said the 2012 Korea-US Free Trade Agreement had cost hundred of thousands of American jobs.

Then there’s the planned Trans-Pacific Partnership (TPP) deal, which involves 12 countries covering 40% of global trade. The bloc aimed to cut the tariffs of some 18,000 goods and services to create a single market that would look something like the European Union (EU). TPP needs to be ratified before February 2018 by at least six countries that account for 85% of the bloc’s economic output. That means that the US and Japan would have to be signatories.

Transmission channels

Obviously if Trump goes ahead with raising tariffs it would have an adverse impact for Asian exporters and Mexico. The impact could be felt in a number of countries and industries.

JP Morgan warns that the sectors most at risk of a trade conflict between China and the US would be: the tech supply chain, consumer exporters to the US, Asian and especially Chinese companies, planned mergers and acquisitions in the US, trade infrastructure (container ports, shipping and air cargo), banks with large exposure to trade finance and outsourcing services including Philippines business process outsourcing (BPO) and Indian IT services.

A lot of pundits envisage a future were the US turns more protectionist, begins to reverse globalization and heightens the chances of geopolitical mishaps.

Myanmar okay

According to United States Census Bureau, the bilateral trade between Myanmar and the US for the first nine months of this year was a trade deficit of $37.7 million for Myanmar; it exported $139.5 million and imported $177.2 million worth of goods and services. So, no big trade exposure. Trade to other countries could be negatively affected, but ought to be small because oil and gas dominate Myanmar’s exports.

Asian investors dominate foreign direct investments (FDI) and tend to be stickier and long-term. Even assuming a worst-case scenario where China is being penalized by the Trump administration, regional investors are likely to increase their investments in Myanmar to avoid higher tariffs, barriers and political risks.

The stock market is even more isolated; foreign investors are unable to buy stocks directly at the Yangon Stock Exchange. Of course the Myanmar-US relationship could potentially sour, but that looks unlikely as it would only benefit China.

Questionable scorecard

PolitiFact, a consultancy firm that checks the rates of accuracy of claims by politicians, compares Barack Obama to Donald Trump:

The scorecard for Obama says the outgoing president tells the truth, or mostly the truth, 48% percent of the time, and has his “pants on fire” just 2% of the time. Statements by Trump, meanwhile, are true or mostly true 15% of the time, and has his pants on fire 17% of the time.

Trump was awarded PolitiFact’s 2015 Lie of the Year. While his Republican party controls the House of Representatives and the Senate, Trump has in recent interviews started to soften his stance. And if he doesn’t follow through on many of his pledges, that should not come as a surprise.

 

Source: Myanmar Business Today

Author: Lars Henriksson

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