This article first appeared in Capital, The Edge Malaysia Weekly on November 11, 2024 - November 17, 2024

THREE key indices in the US — the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite Index — inched up to record highs last week following Donald Trump’s stunning victory in the Nov 5 presidential election. However, the reverse could happen in emerging markets as funds may flow out from these regions.

With Trump’s pro-US stock and bond market initiatives, boutique fund house Tradeview Capital CEO Ng Zhu Hann says this may halt fund flows into emerging markets. “If US stocks continue to perform well, this may even attract more funds back to the US. The risk at the end of the day is higher in terms of policy swings,” he tells The Edge.

He foresees that uncertainty over Trump’s administration will pose a bigger risk to capital markets and global economic policies.

“Whatever Trump says, we don’t know whether it will materialise into policies. What he wants is a strong US dollar and [putting] America first, as well as cutting the corporate tax, ballooning the national debt with expansionary fiscal policies. All these will drive inflation. So, in a way, if the US Federal Reserve interest rates continue to come down, the whole inflation situation will go out of control,” Ng explains.

RHB Economics & Market Strategy says in a Nov 7 report that tensions between the US and China might contribute to capital flight from emerging markets, at least in the short term, increasing pressure on the ringgit and leading to financial market volatility.

“Empirical evidence from 2017 to 2021 during Trump’s prior administration reinforces our view; the USD-MYR continued to weaken towards 4.20 per USD by the end of 2021 (which persisted to a peak of 4.78 per USD in 2022) on the back of dollar strength and periodically weaker net flows into Malaysia-centric assets,” it says.

Trump’s second term may suggest an upside bias for US-centric growth and business confidence, but US policy uncertainty could also amplify risk-off sentiment, potentially affecting foreign investor confidence in Malaysia’s stock and bond markets, it adds.

Year to Nov 1, foreigners had been net buyers of Malaysian equities to the tune of RM1.78 billion. This came after a huge foreign outflow of RM1.01 billion for the week ended Nov 1, compared to net selling of RM196.2 million the week before.

However, local institutions had supported the local bourse over the past two weeks, with a net buying of RM960.4 million in equities for the week ended Nov 1. Local retailers turned net buyers after purchasing RM49.4 million in equities.

Fortress Capital founder and CEO Datuk Thomas Yong says Trump’s plan to raise tariffs is likely to stoke inflationary pressure, which will cause the US dollar to strengthen. As a result, this will generally be negative for emerging markets due to expectations of their currencies weakening against the greenback.

While the US-China geopolitical tension had been expected to continue regardless of which party wins, Yong notes that with clarity now on a second Trump administration, the tariff war is likely to intensify and accelerate the China Plus One strategy for many corporates.

“This will generally benefit Southeast Asian countries as foreign direct investments would flow in. Having said that, as the largest trading partner to Malaysia, a slowdown in China’s economy will inevitably affect the economy of Malaysia,” he explains.

Areca Capital Sdn Bhd CEO Danny Wong concurs, saying that Trump’s return as US president does not bode well for the global economy given that he is likely to implement more protectionist trade initiatives.

“Right now, it is very important for the Fed to continue its independence, with rate cuts being imminent and beneficial to this part of the world as funds will flow back here,” he says, noting that Malaysia — as one of the high-growth countries in Asia — could then attract the money flows.

Trump had often been critical of the Fed and its chair Jerome Powell, especially for raising interest rates, even though the former nominated the latter for the job in 2017. Powell’s full term as the Fed chair ends in 2026.

Meanwhile, Kenny Yee, head of research at Rakuten Trade, is less concerned about the fund flow impact on Malaysia, as any potential outflows from Hong Kong and China — as a result of Trump’s policies — may eventually benefit Malaysia. “The funds need to find a destination, so I think Asean may somehow benefit from this.”

Over the longer term, Yee sees investors becoming cautious about the US market. Despite Trump’s various election pledges such as keeping the US dollar strong, he doubts that all these promises can be achieved as the whole economic dynamics have changed.

“The economic and US dollar dynamics are no longer the same as when Trump was the president before 2020,” he explains.

Singapore’s state-owned Temasek International’s chief investment officer Rohit Sipahimalani had earlier warned that a Trump administration will lead to slower global growth, which will eventually affect US companies.

“A Trump win is probably going to mean a stronger dollar and higher rates than you would otherwise have in a Harris administration. The tariffs are going to create uncertainty, which is never good for investment and actually I think it’ll be negative not just for emerging markets but across the world,” he had said.

On a global perspective, Franklin Templeton Institute investment strategist Christy Tan says historically, a Republican clean sweep has been the most bullish scenario for S&P 500 average returns, generating an average return of 16% during the administration.

“For equities, the biggest winners will be sectors and industries welcoming a more business-friendly regulatory environment, including fossil fuel energy companies, financial services and smaller capitalisation companies. Fears of caps on prescription drug prices will recede, boosting the fortunes of the pharma sector.”

Given the election results, the extension of the 2017 Trump tax cuts is somewhat assured, says Tan.

“It is probable that the statutory and effective corporate tax rates will be lowered (the former to perhaps 15%) and that sweeping changes to business regulation will follow. What is less certain is whether tariffs will be increased on the scale and scope matching Trump’s campaign rhetoric. That outcome will likely be determined on a case-by-case [basis] via bargaining among trading partners and with considerable input from the US business community,” she adds.

For the fixed-income market, Tan says there are realistic expectations and concerns over the increase in long-term debt supply to finance short-term fiscal spending, which will likely lead to higher yields in the long end of the curve.

“However, for investors looking at the next six to 12 months, we can be certain that the Fed will maintain its easing cycle and we expect the overall environment to be conducive for fixed income investments for portfolio diversification. Our investment teams are expecting the 10-year yield to fall to 3.75% and federal funds rate to fall to 3.6% by the end of 2025,” she says.

Despite the expected market volatility, CIMB Securities’ preliminary analysis indicates that Malaysia’s plantation, gloves, technology and transport sectors stand to benefit from Trump’s policies. Its top picks of companies that are expected to gain from Trump’s policies include SD Guthrie Bhd (KL:SDG), Inari Amertron Bhd (KL:INARI) and Hartalega Holdings Bhd (KL:HARTA).

The research house expects the plantation sector to benefit if China retaliates against Trump’s proposed 60% tariffs on Chinese imports by imposing tariffs on US soybeans. Meanwhile, a strong US dollar and accelerated supply chain expansion will bode well for the tech sector.

Similarly, the strengthening of the greenback will help Malaysian glove manufacturers and if the US increases tariffs on Chinese gloves, demand for Malaysian gloves may rise. Note that under the Biden administration, the tariff on China-made medical gloves was raised to 50% next year and 100% in 2026, from 7.5% currently.

However, the auto and oil and gas sectors may face challenges.

“A stronger US dollar against the ringgit may increase import costs, putting downward pressure on the profitability of the auto sector … Furthermore, a 60% US tariff on Chinese imports could weaken China’s economy and reduce consumer spending, which may impact Sime Darby Bhd’s (KL:SIME) motors division in China.

“Trump’s energy policies favour the expansion of US domestic oil production through additional exploration permits and a relaxed stance on environmental regulations … Global oil prices may remain stable, with CIMB projecting Brent crude to range between US$73 and US$75 per barrel in 2025. Rising global production, combined with lower demand from China and the absence of significant geopolitical disruptions, is likely to keep oil prices within this range,” CIMB Securities says in a Nov 7 note.

Post-elections, the research house expects the stock market to benefit from an immediate flight to equities, with markets shifting to risk-on mode as uncertainties relating to the US elections dissipate.

“This is positive for the FBM KLCI, which had been subject to profit-taking before the US election,” it opines.

CIMB Securities says potential policies under Trump that could have implications for Malaysia include a planned 10%-20% tariff on imports and a 60% tariff specifically targeting China, along with a matching tax for other trading partners. 

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