HSBC: Watchout Asia, Donald Trump Might Get What He Wants… And You May Not Like It

Asian nations are wondering “with a little trepidation” if Donald Trump will deliver on his campaign promises. There is talk of direct confrontation in the South China Sea, but more to the point are trade and geopolitical concerns, an HSBC analysis observes. That is the dramatic downside. But there is a wide distributions of returns, as the upside – Trump takes “a more pragmatic turn” – could significantly benefit the region. The uncertainty is perhaps a parable for many situations in what appears an adjusting to an increasingly unclear world order.

The US doesn’t need fiscal stimulus, and 4% GDP growth is out of bounds

There is upside and downside risk in all investments. It is the volatility of returns that appears to be increasing.

Consider the need – or lack thereof – for fiscal stimulus. “All considered, America’s economy is already growing at a respectable speed, with the unemployment rate well below five per cent and wage growth ticking up of late,” the HSBC report noted, questioning the need for potentially budget-busting stimulus.

Granted, economic-head cheerleader Steven Mnuchin might appear optimistic at calling for 4% GDP growth, but what isn’t being considered is the downside.

Strong GDP growth to overcome disappointing productivity, flagging for the last decade, could have an unwanted consequence: US Central Bankers could raise rates quicker than anticipated, HSBC’s Frederic Neumann wrote in a January 20 opinion piece.

Be careful Asia, Trump may get what he wants

The report’s title, “If Trump does what he says, Asia will feel the pinch,” addresses a region dependent on the US and afraid to “wean itself off credit.”

Asia’s economies have been built on trade, so protectionism in the US, and possibly beyond, comes at an especially awkward time. Local demand, after all, has begun to sputter, with leverage-driven growth increasingly exhausted. Balance sheets are stretched and productivity gains have withered. It should be remembered, however, that Asia did the world a service by splurging on debt in years past, helping to sustain global growth at a time when the West had stumbled. Now, as the region requires a helping hand to wean itself off credit, is not the time to shut off trade.

Regardless of regional consideration, Neumann predicts pragmatism is likely to prevail.

A negotiator is at work

The Trump bluster is an intentional tactic. This is a master negotiator setting up its prey. Look at China, for example. The “uncomfortable” positioning is what negotiation is all about:

As uncomfortable as recent utterances by Mr. Trump may be for local officials, these may yet prompt useful negotiations. Greater market access by American firms to the vast, and still rapidly growing, Chinese market is one objective for US negotiators to aim for. That might help to “rebalance” the bilateral trade relationship, preserving trade between the two countries while also generating US jobs.

Negotiate for better access to Chinese markets and deliver what business wants in the region: a strong friend. Its objective behind the Trans Pacific Partnership (TPP) is not dead just because Trump withdrew. Understand the new reality.

“Pragmatism suggests that the US could still ratify an agreement that is so evidently in its own interest, not just economically but also geopolitically,” the report said, speaking in context of TPP. If at first you don’t succeed, try again under the cover of another initiative.

While the popular headline may read “Trump withdraws from TPP,” when negotiations with individual nations occur, the issues that matter to globalization could find their way back into the final deal, just on a more one-to-one basis.

Even domestically, the Trump administration may take a more nuanced approach, carefully calibrating its tax cuts and spending so as not to stretch the US economy and fan inflation that would lift rates and boost the dollar, rendering its goal of sustained prosperity harder to achieve. In that case, Asia may not be entirely spared the effects of financial conditions tightening, but these would prove muted enough for the region to take the Fed’s hike in stride. Which Trump will move into the White House over the weekend? The campaigner or the pragmatist? Asia is watching closely, and dearly hoping it will be the latter.

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Source: valuewalk