How does the change of administration in the United States impact Emerging Asia? How will the relationship with China change? And where do investors find the best investment opportunities in Asia in the current situation? We spoke to Kunjal Gala, Lead Portfolio Manager, Emerging Markets, at Federated Hermes.
AsiaFundManagers.com: The conflict between China and the USA seemed to be postponed. How will things continue after the US elections?
Kunjal Gala: Politically, China has become a major issue for both parties in the US, which fears its rise, spreading global influence, and rejects its authoritarian model and treatment of minorities such as the Uighur Muslims in Xinjiang. The Executive Order underscores the continued, tense Sino-US relationship. Over the past year, the US government has embarked on a coordinated effort to ratchet up pressure on China across several fronts, including new export restrictions and economic sanctions, publication of supply chain alerts, and intense scrutiny of investments in U.S. businesses by China- and Hong Kong-based investors. These efforts appear unlikely to subside in the near term, notwithstanding the result of the US presidential election.
President Trump issued an Executive order on 12th November prohibiting US investments in Chinese companies that Washington says are owned or controlled by the Chinese military. The list of firms includes aerospace, shipbuilding, construction, technology and communication companies and including subsidiaries or related companies, the order covers more than 130 companies.
Trump’s latest orders are likely to have negative repercussions on various companies in China and have soured the relationship further. With Biden taking over, we expect the relationship between the two superpowers to become less confrontational. However, pressure on China is likely to be sustained as Biden could possibly unite with European allies to counter China. The overall orientation of the US administration on top priority issues like trade, technology and security are less likely to shift under Biden. Instead, we expect he will opt for a strategic review of the relationship, engaging more with multilateral organisations. This should nonetheless help reduce headline volatility and fears of de-globalisation.
AsiaFundManagers.com: What does the election of Joe Biden as US President mean for the Asian stock markets?
Kunjal Gala: A Biden Presidency should result in less headline risk and lower volatility. We expect Biden and his team to be more predictable than Trump, and more prone to a multilateral, pragmatic approach with a focus on globalisation, and hence positive for emerging markets. The implications of a widening US deficit, possibly more predictable U.S. foreign policy, and lower bond yields is a weaker US dollar. All of which are positive for emerging markets, and notably, Asian assets.
AsiaFundManagers.com: Will ASEAN countries have to choose a partner sooner or later – the US or China?
Kunjal Gala: Joe Biden in the White House may come as a relief to ASEAN countries which have endured Trump’s erratic policies towards China, especially putting countries in the difficult position of effectively having to choose between China and the US. Throughout his term, Trump has sought to bring countries to the US side exemplified by the call to countries to ban Huawei from their 5G networks. Trump withdrew US membership of the transpacific partnership and government officials have rarely attended Asia’s key economic summits. The administration’s tactics then emphasised isolating China from regional economic networks and prioritised security arrangements centred on Australia, India, Japan, and the United States. The US approach antagonised ASEAN and other East Asian countries, forcing countries into unnecessary and risky political choices. US absenteeism from the region also allowed Chinese economic and political influence to surpass the US.
However, ample good will toward the US remains and Joe Biden is expected to lift US engagement in the region though no changing tack on the issues with China given bipartisan support for heading off China’s economic challenge and threat to national security.
The US and China will increasingly compete directly in multiple spheres from technology, security, health policy, financial markets and corporate governance. Europe, Japan, ASEAN countries and the rest of the world (including India and Brazil) will attempt a balancing act, vying for influence and economic opportunity.
AsiaFundManagers.com: What significance does the recently concluded RCEP Free Trade Agreement have for Emerging Asia?
Kunjal Gala: The Regional Comprehensive Economic Partnership (RCEP) ostensibly secures one of the largest free trade agreements in history representing 15 ASEAN countries and five regional partners. RECP has garnered a lot of media attention, and it is certainly a good step. On the one hand, it’s a comparatively low standard deal – reducing tariffs and increasing trade, but not aligning governments on labour and services, climate change, data and intellectual property (like the transpacific partnership). On the other, it should add hundreds of billions to increased world trade over the coming decade, with overall economic growth and income levels picking up accordingly. RCEP needs to be ratified and implemented and only then will you see who the winners and losers are. It will doubtless lead to growth opportunities for exporters within the region and helps China strengthen its relations with neighbours, rewarding eight years of patient negotiations. It is also a timely-signal for Joe Biden’s incoming administration and a powerful counterexample to the global decline in rules-based trade.
AsiaFundManagers.com: What structural changes do you observe in Emerging Asia beyond Covid-19?
Kunjal Gala: We believe that the emerging market structural growth opportunity remains intact, driven by an aspiring, growing middle class, rising digitisation, reforms and infrastructure development. As industries consolidate following the economic damage from the coronavirus pandemic, companies with strong balance sheets and capabilities will benefit from these structural drivers. Accordingly, the fund retains a focus on long term structural themes such as 5G, digitisation, IoT, rising financial penetration, healthcare, premiumisation and infrastructure. The team expect companies benefitting from these trends to outperform regardless of the ongoing political/economic uncertainty, weak commodity markets and potential credit quality issues.
AsiaFundManagers.com: Where do you find value for your investors in the current situation?
Kunjal Gala: We continue to find value in financials adding bank positions in Mexico and Indonesia and more recently, a leading Indian consumer and small-to-mid-sized financial services company. We are looking at several opportunities in the materials segment, related to copper, nickel and solar glass. We have been marginally adding to cyclicality, resulting in our overweight industrials, where we feel that there is enough margin of safety and the company will benefit from medium/long term catalysts. We are looking to add attractive value names where we see opportunities and may continue to add to sectors that benefit from a cyclical rebound.
AsiaFundManagers.com: Thank you very much for sharing your insights.
Lead Portfolio Manager
Kunjal joined the international business of Federated Hermes in February 2012 as a senior analyst on the Emerging Markets team focused on Asia ex Japan. In January 2020, he became co-portfolio manager for all portfolios managed by the Global Emerging Markets team and was subsequently named lead portfolio manager in September 2020.