Post-Trump Emerging Markets’ Exuberance
Yopie Hidayat (Contributor)
THE markets had predicted that a blue wave would overwhelm the United States. Joe Biden would be elected as the 46th president of the United States with strong support from the Democratic Party, which rules over a majority of the Senate and Congress. Blue is the color of the Democratic Party. That blue wave is ultimately not so overwhelming. Yet, investors in emerging markets are still very happy.
The vote count is still going on, tensely neck-to-neck, and it looks like the Democrats will not be getting a hold of the Senate majority. Even so, the markets of emerging economies have moved quickly. Investors have anticipated the positive effects of the change in presidency this coming January.
Such moves are quite speculative, considering that Biden’s victory is not final yet. It is not impossible that there will be disputes over the vote count, which will throw the situation into further disarray. But investors seem to not care, choosing to drown into a rather irrational exuberance.
Markets already anticipate a better flow of international trade once Biden tears down the fences of protectionism Trump built. America will trade more freely. Many emerging markets will stand to benefit, especially those that rely on the US as its main export destination.
If the US becomes more open, its trade deficit will also grow larger. This has the potential to weaken the US dollar. Many emerging markets whose currencies have been pressured lately by a strong US dollar will be more comfortable in conducting fiscal and monetary policy.
Take Bank Indonesia as an example. If the pressure on the rupiah lets up, Bank Indonesia will have greater freedom in determining its policies, with less worries that the rupiah will slump if it decides to lower interest rates. Lower interest rates will then be able to invigorate the economy.
Election results were not the only good news for emerging markets. On Thursday, November 5, in the midst of vote-count tension, Federal Reserve Chair Jay Powell gave out a signal that made emerging markets even happier. Powell reaffirmed that the Fed will not change its policy. Interest rates will stay at its lowest level, between zero and a quarter percent. Bond purchases by the Fed, which means more liquidity coming into the market, will not be slowing down, either.
Powel cited the worsening Covid-19 situation in the US and Europe as a deciding factor to maintain interest as low as possible. The continued spread of the pandemic, along with the continued streak of record breaking numbers of new cases in the US, has convinced the Fed that interest rates need to stay low to prevent economic collapse.
In the eyes of investors, there is nothing scarier than higher interest rates and tighter dollar liquidity. An abundance of cheap dollar due to low interest in the US is the main fuel that keeps the engines of financial markets in emerging economies humming.
So when the Fed gave out a signal that guaranteed a prolonged existence of those two crucial factors, it was as if the market was hit by a shockwave of happiness. The rupiah, for instance, strengthened drastically, appreciating by 2.72 percent in just a week. By the end of the week on November 6, the rupiah sat at 14,200 per US dollar. Stock prices in Indonesian exchanges rose by 4.04 percent in the same time period.
The market does not care about the news saying Indonesia is officially in a recession after two back-to-back quarters of negative growth. Official definition of a recession actually is just merely a footnote of history between April and September. It has passed. The slump was also already reflected in financial asset prices in the market, way before today.
The main determinant of financial asset prices today and in the future is not the history of economic performance. What happens tomorrow, next month, or even next year, that is what will determine the movements of exchange rates, interest rates, bond yields, and stock prices
So there is no point in lamenting about the economy being in recession. As long as positive sentiments from the US are coming to Indonesia, just enjoy it.