"It all depends on which Trump shows up,” said Piyush Gupta, chief executive of Singaporean bank DBS. “Will it be Trump the businessman or Trump the demagogue?”
That is a question facing policy makers, bankers, investors and issuers across the world at the moment, as they prepare for Donald Trump to be inaugurated as president of the United States on January 20. After a raucous, sometimes outlandish campaign, everyone knows what Trump said. Few can claim to know what he really means.
That has added an unwelcome source of volatility to Asia’s markets. The MSCI AC Asia Pacific stock index fell by 3.3% the day after the election, although it has slowly recovered since. Asian bond yields ballooned after Trump was elected. Typical new issue premiums in Asia’s bond market, small to non-existent for much of the year, moved into double digits after Trump’s election — and stayed there.
Barely two weeks after the election, net capital outflows from India, Indonesia, Korea, the Philippines and Thailand had hit $10 billion, according to Moody’s, citing data from the Institute of International Finance. The ratings agency said the withdrawal was as steep as during ‘the taper tantrum’ of 2013, when investors fled Treasuries amid a reduction of quantitative easing.
Investors and analysts express cautious optimism. Some market participants told FinanceAsia they were confident the businessman side of Trump’s personality would win out, and sensible policies would follow. Others stressed the system of checks and balances in place to ensure Trump’s policies do not veer too far off course.
But many market participants admit that they have no certainty about how things will play out. FinanceAsia considers the risks for companies navigating the region’s debt, equity and M&A markets in the Trump era.
The good, the bad & the ugly
The potential negatives of a Trump presidency are easy to imagine. Trump sticks to his campaign promises and imposes trade barriers, damaging those Asian economies that are reliant on global trade or business outsourcing for growth, such as Vietnam, the Philippines and India. Another option, economists say, is that the Trump administration attempts to specifically target trade with China.
That could lead to a trade war between the two biggest economies in the world. Trump could further inflame political tension by carrying on with the same rhetoric that led him to brand China ‘a currency manipulator’ on Twitter just weeks after getting elected.
In short, he takes his shoot-from-the-hip style into the White House, and investors are forced to endure a period of great uncertainty.
But the worst-case scenario does not have to happen for Trump to have a large impact on Asian banks, companies, and markets. Trump’s promise to boost infrastructure spending in the US — he has pledged to spend $1 trillion — is widely being seen as a positive step.
In the more optimistic scenario, Trump’s push to increase spending will boost demand for exports from Asian corporations, in turn leading to more fund-raising from these countries, and potentially giving a jolt to equity capital markets that have remained tepid throughout 2016. Asian IPO volumes fell to $59.4 billion this year, according to data provider Dealogic, falling for the second year in a row.
US stock markets certainly took his election well, choosing to emphasise the positive of a fiscal boost over obvious uncertainty. The S&P 500, the Nasdaq and the Dow Jones Industrial Index are all up since Trump’s election, the latter by more than 5%.
“Monetary policy has reached its limit in terms of contributing to growth, but there’s a lot more room for fiscal policy to contribute,” said the Asia Pacific CEO of a global bank. “That is one area where Trump has said he wants to do more, and the market is already rewarding that.”
The US market has, at least. Hong Kong’s Hang Seng Index and India’s Sensex are both down. The Shanghai Composite Index is flat. The MSCI AC Asia Pacific, after plunging the day after the election, has clawed back to be trading just above even.
The poor returns on Asian equities are perhaps a natural consequence of Trump’s fiscal focus. Although analysts welcome his fiscal stimulus package as a necessary next step for the US economy, the bulk of the impact is going to be domestic.
As Rafael Consing, chief financial officer of Philippine container terminal operator ICTSI, puts it: “Monetary stimulus crosses borders, but fiscal stimulus is very domestic.”
That does not mean his fiscal spending boost can be ignored in Asia, of course. The higher interest rates that are likely to follow a major infrastructure-spending plan could spike volatility in Asia’s bond market as more money flows into the US. The Federal Reserve increased interest rates by 0.25% in December. Analysts think Trump’s policies could encourage the central bank to hike again earlier than it otherwise would have.
The risk of huge capital outflows from Asia should not be exaggerated, said Hao Zhou, senior emerging markets economist at Commerzbank. He argued that the strength of Asian economies — still, in most cases, growing much faster than the developed world — would stem the risk of huge outflows.
But there has already been an impact on Asian bonds. Asia’s iTraxx investment grade index widened by 16 basis points to 133.4bp in the week after Trump was elected, but has slowly moved tighter again. New issue premiums have risen. Investors have stuck to the side lines amid the volatility, making deals harder to close.
Presuming rates continue to move up in response to Trump’s fiscal boost, rising funding costs would put pressure on Asia’s more dollar-reliant issuers. The $121 billion of dollar bond maturities Asian issuers are facing next year, more than 70% higher than this year, means they will face some tough-to-swallow refinancings.
“Issuers are going to face a rising interest rate environment and investors that increasingly have the ability to be picky,” said ICTSI's Consing. “There are a lot of maturities coming up in the next five years. That’s the real risk.”
In equities, the volatility that follows Trump’s election will lead to “great companies in shitty markets” in some Asian countries, warned one executive. The swings in valuation that are likely to follow rising risk-free rates may make these companies undervalued, but they should be able to maintain good growth, he said.
There are several large IPOs that could come to the market next year. In Hong Kong, Chinese online lender Lufax has picked banks for a $3 billion IPO and Zhong An Online Property and Casualty is planning to raise around $2 billion. South Korean online games company Netmarble Games is planning a domestic listing that could be worth $1.6 billion. Vodafone India could raise $2 billion in a local IPO. Ant Financial is mulling an as-yet unannounced listing.
Equity market volatility will also lead to opportunities for block trades, as well as equity-linked deals. These deals may not be as glamorous as IPOs, but their quicker execution means that for nimble companies they are perhaps a smarter a way of accessing capital.
But although the risks to bond and ECM markets are pronounced, it is Asia’s acquisitive corporate executives that have most to fear. Chinese companies, particular, have been on a rampant spree of acquisitions in 2016. These companies now face being squeezed between Trump’s anti-China rhetoric — and increasing scepticism from their own government.
Huge, huge deals
China’s outbound M&A volumes had hit $218.6 billion by mid-December, according to Dealogic data. That number includes a few transactions that appeared to make little strategic sense — for example, the purchases of stakes in European football teams by Fosun International, Dalian Wanda and others.
But it also included transactions that were smart, strategic, and ambitious. ChemChina’s $43 billion bid for Swiss agriculture company Syngenta looks set to break all records for Chinese outbound acquisitions, though it still has regulatory hurdles to clear. A Tencent-led consortium’s $8.6 billion purchase of games designer Supercell showed the increasing maturity of deal structures, and was FinanceAsia’s deal of the year.
Some deals did not pass the finish line, including some high-profile attempted acquisitions in the US. Some of the hurdles were blamed on the Committee on Foreign Investment in the United States (CFIUS), a review board that makes recommendations to the US president. For example, Barack Obama decided in early December to block the bid by a subsidiary of Fujian Grand Chip Investment Fund for Germany’s Aixtron.
Other deals were pulled in anticipation of CFIUS objections.
US chipmaker Fairchild Semiconductor rejected a bid by a Chinese consortium, citing concerns that CFIUS would block the deal. Another Chinese consortium, lead by Qihoo 360 Technology and Beijing Kunlun Tech, withdrew a takeover offer for Opera Software for a similar reason, although CFIUS never announced it was conducting a full review. The consortium instead settled for a partial stake in Opera.
The situation may get tougher. On November 16, the US-China Economic and Security Review Commission — a congressional committee that makes recommendations but lacks regulatory power — argued Chinese state-owned companies should not be allowed to make acquisitions in the US at all.
But the problem is not all from one side. In November, four Chinese regulators issued tougher guidelines on offshore M&A, refusing to approve ‘non-core’ deals worth more than $1 billion until September 2017, and strengthening currency regulations that already hinder Chinese companies buying overseas.
“As we look to 2017, we think that the foreign exchange controls may considerably dampen M&A activity if companies have a harder time getting FX out of the country and if the approval process for deals gets tougher,” said Joseph Gallagher, head of M&A for Asia Pacific at Credit Suisse. “Having said that, deals that are strategic to the country, either from the state owned sector or the private sector, are still likely to be approved. But it may take a little longer from a sell-side perspective.”
Chinese companies could boost their chances by concentrating on emerging markets, perhaps within China’s Belt and Road initiative that covers around 60 countries. Shanghai Electric Power’s acquisition of 66.4% of Pakistan’s K-Electric for $1.77 billion offers a good example of a deal that makes strategic sense and fits in with the Chinese government’s broader strategy.
In any case, some of the most high-profile Chinese outbound M&A deals this year are still navigating the approval process. ChemChina’s $43 billion offer for Syngenta, aluminium company Zhongwang’s acquisition of Aleris in the US, and insurer Anbang’s acquisition of Strategic Hotels and Resorts from Blackrock all await final approval.
A Hong Kong-based M&A head admitted his Chinese clients felt cautious about launching big US acquisitions, saying that any deals worth more than $10 billion will be held until Trump’s stance is clearer.
Perhaps that sums up the attitude to Trump. His inexperience and unpredictability mean few companies want to bet on how he acts in office. But whether Trump the businessman or Trump the demagogue shows up, one thing is clear — it’s going to be a rocky ride.
