This is a special post authored by Kim Iskyan and our friends over at TrueWealth Publishing – an independent investment insight provider on Asia. Views and insights do not reflect positions from Call Levels.

If history is any guide, under Republican U.S. President Donald Trump, Asian stock markets should perform strongly this year… and in 2019.

But history may not be much of a guide. In his first day in office, Trump turned the global trade system on its head, by signing an executive order to pull the U.S. out of the Trans-Pacific Partnership (TPP). This is part of Trump’s “America first” policy – and may hand the mantle of main supporter of globalisation to China. Meanwhile, President Trump’s next tweet storm – or the one after that – could hit Asian (or any other) markets.

 

The U.S. election cycle and Asia’s stock markets

 

In the past, when a candidate from the Republican party of the U.S. (such as Donald Trump) has become the country’s president, Asia’s markets overall have performed well during the first year of the new president’s term, rising just over 15 percent on average.

But the real fireworks have begun during the third year (which will be 2019) of a Republican president’s four-year term. During this year, the MSCI Asia ex Japan Index has seen average returns of nearly 38 percent. Hong Kong’s stock market has risen nearly 35 percent, Singapore and Malaysia have seen average returns of 28 percent and 25 percent, respectively. Except for Hong Kong, election year (which was 2016 in the most recent election cycle) has been weak for Asia’s markets, with the MSCI Asia ex Japan rising just 2.6 percent.

 

For our purposes here in the graph above, we break the election cycle down into four periods:

  1. Post-election year: The first calendar year after the U.S. presidential election. For the current cycle, it’s this year – 2017.
  2. Midterm: The second year. This is 2018 in the current cycle.
  3. Pre-election: Year 3 of the president’s term, which is also the year before the next election. This will be 2019 in the current cycle.
  4. Election year: The fourth year of the president’s term, and the year in which elections are held. 2016 marked the election year in the previous cycle, and 2020 will be the current cycle’s election year.

However, the sample size for the Asian market results is small. The indexes that we’re using – and Asia’s stock markets – haven’t been in existence for many four-year American presidential cycles. And broken down by the two major U.S. political parties, the sample size is even smaller. For instance, the MSCI Asia ex Japan Index has only seen seven U.S. presidential election cycles, covering three Republican presidents and four Democratic presidents. The small number of data points means that historically unusual periods (like big stock market losses during the global economic crisis in 2008, or particularly strong years for the stock market) have a very big impact on average returns.

 

Why would American politics affect Asia’s stock markets?

 

Only rarely does American foreign policy towards Asia have a direct impact on stock market performance in Asia. Far more important is the role of American politics on U.S. market movements, and on global stock market sentiment – and therefore also on Asian markets. This may play out in a much larger way in smaller, less liquid markets in Asia (where a smaller absolute amount of funds invested or withdrawn can have a far greater impact than in bigger markets). So positive or negative sentiment in the U.S. with respect to American policy, and presidents, might impact Asian markets more than others.

In recent months, Donald Trump’s statements and tweets have had a big impact on a range of U.S. stocks and sectors. Earlier this month, for example, the market value of nine large U.S. pharmaceutical companies lost almost US$25 billion in value in 20 minutes after he criticised the industry during a press conference. And his opinions and anticipated policies regarding China – threatening to label it a currency manipulator, and launch a trade war with China have also pressured Chinese, and Asian, share prices in recent months.

In light of Trump’s unorthodox policies and positions, stock market performance patterns may be completely different over the next four years from the past. So the solid returns posted by Asia’s stock market during the third year of the terms U.S. presidents from the Republican party may not come to pass this time around. And in the meantime, it’s looking like the “Trump rally” is running out of steam.

 

 

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