The US Election Result And Asia

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By Greg Peel

As of today we have a Democrat in the White House, a Republican majority in the US House of Reps and a Democrat majority in the Senate, just as we had the day before. The only difference is that the Republicans were hoping to alter the status quo yesterday, but didn't. Now they are stuck with a Democrat administration for four more years and this Congressional balance for at least two. Do they concede or do they fight?

At risk is the fiscal cliff. To recap, the fiscal cliff refers to the simultaneous expiry of income tax cuts for higher US earners and forced spending cuts (referred to in the US as "sequestration") as at the beginning of 2013. The Acts created to secure these changes represent the deadlock reached this time last year between the parties which could not be broken, so instead negotiations were put off for one more year. As noted, the Republicans were hoping to be in charge by now, but they are not.

Republican House Speaker John Boehner suggested this morning his team is ready to compromise, but not concede. Commentators are not convinced. Wall Street is clearly far from convinced. The fear now is that the US will plunge over the fiscal cliff and into recession. Simultaneous tax hikes and spending cuts will ceteris parabis reduce debt, but the negative impact on GDP growth will threaten a fall in revenues to offset the chance to reduce debt.

"From and Asian perspective," suggests Andrew Swan, BlackRock's head of Asian fundamental equities, "the major impact of the US presidential election will be on investor sentiment, primarily as it relates to the impending fiscal cliff". The automatic spending cuts equate to a 5% budget reduction, Swan notes, which will "clearly be negative for the US recovery and the associated Asian export market".

Given the deadlock in Washington, Swan believes a compromise will be difficult to achieve. The trade-off, however, is that under President Obama the Fed's QE program will continue to be supported, which in turn will be supportive for Asian equity markets given increased global liquidity and a weaker US dollar.

Current Asian equity market forecasts are suggesting 12% earnings growth in 2013 ? consistent with the long-term trend. Such an achievement is going to depend on global growth and regional policy decisions, and further policy stimulus will likely be needed, Swan suggests.

Policy will be important not only in the typical form of monetary/fiscal but also in terms of structural reform. Swan notes recent short and long term structural changes announced in India have seen the Indian equity market sharply re-rated. The hope now is for similar policy announcements soon from the new Chinese regime that will address short and long term economic issues.

BlackRock's head of Asia-Pacific fixed income, Joel Kim, believes the election result (Administration and Congress) is "the most politically difficult in terms of resolving the fiscal cliff".

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