A new U.S. administration, rising rivalry with China, and multilateral agreement in Asia put investors on alert
A look at the top-line returns for the FTSE Developed Market Index and the FTSE Emerging Markets Index last year shows marginal differences, with the developed-market benchmark advancing 16.64% and its emerging-market counterpart growing 15.38% over the year, respectively. But looking at the component countries shows wide variations in performance, bolstering the case for single-country allocations.
While much has been written about how economies may recover from the COVID-19 driven recession at different rates, investors can also choose their single-country exposures through a geopolitical lens, according to Dina Ting of Franklin Templeton Exchange-Traded Funds.
“President Biden and his administration came into office with an ambitious agenda and immediate plans to roll back the outgoing administration’s executive orders,” said Ting, head of the Global Index Portfolio Management Team, in a new paper.
Aside from climate-oriented initiatives that included revoking the Keystone XL pipeline permit and rejoining the Paris Climate Agreement, Biden has signed a massive COVID-19 stimulus package aimed at reigniting the U.S. domestic economy. A “Made in America” executive order he signed in January, meanwhile, raises domestic supply requirements, pushes for sourcing from small- and medium-sized U.S. suppliers, and tightens supervision of the “Buy America” waiver program.
“Sectors most likely to benefit domestically are information technology, industrials and health care,” Ting said, adding that the global impact on competing non-domestic suppliers will be hard to estimate.
The U.S. and China are also escalating their fight for world dominance across geopolitics, commerce, and technology, with Southeast Asia emerging as a key battleground, she noted. Elsewhere, China has been gathering influence by supporting infrastructure developments across Asia and Africa. More recently, it has also taken the pandemic crisis as a chance to establish leadership by assisting other countries with COVID-19 management and vaccine distribution.
Another pivotal event came last November 15, 2020, when 15 countries in the Asia Pacific region – including the 10 countries of Southeast Asia as well as Japan, China, South Korea, Australia, and New Zealand – signed the Regional Comprehensive Economic Partnership (RCEP). A pact nine years in the making, it represents a definite geopolitical win for China, which got the better of the U.S. by becoming part of the largest trading bloc in the world that accounts for one third of the world’s economic output (US$26 trillion).
“It is also the first free -trade agreement among China, Japan and South Korea, which together account for about 24% of the world’s economy and a combined yearly trading volume of over US$720 billion,” Ting said.
Among the triumvirate of Asian heavyweights, Ting said Japan stands to benefit most from its trading partners, as the RCEP lifts tariffs on an estimated 90% of Japan’s export to those countries. As a result, trading volumes between the countries could increase considerably, as well as potentially shorten supply chains by virtue of the increased ease of trading with proximal countries.
