Recently, investors have been witnessing political events in the world’s two largest economies that could have quite a profound impact on global economic development in the next four to five years. They are:

• the fifth plenary session, where the central committee of China’s ruling political party passed key economic and social development goals and priorities for the next five years; and
• elections in the US to select the presidential and congressional leadership for the next four years.

The US presidential race has come to an end and a new administration is now in waiting. Come January 2021, the US government may have a White House and the upper chamber of Congress on opposing sides. That could bring some challenges to governing in the medium term¹.

On the other hand, China's economic policies and development priorities for the next five years are relatively straight-forward. So as we await the final tally of the US elections, we share our views on the investment implications from these events, and the potential opportunities that could emerge.

Public health crisis and economic recovery

The most urgent task for both China and the US is tackling the resurgence of infections and mitigating the economic fallout from the public health crisis.

As yet, statistics show that China has successfully contained the health crisis. Economic recovery has been gradual, and on a growth trajectory since the second quarter. The economy grew 4.9% in the third quarter² and domestic retail sales and consumption have also begun to show positive growth. Although China’s export performance is still affected by external factors, the economic stimulus provided by the People's Bank of China and the government is relatively conservative. China has also continued to focus on structural reforms.

In contrast, many US cities may have to reimpose mobility restrictions and closure of services amid a resurgence of infections. At the same time, Congress has not passed a new round of measures to support businesses and low- and middle-income families, further threatening economic growth in the fourth quarter. As such, more support measures are needed, alongside a better infection control strategy¹.

Governments around the world are in for a long fight as the health crisis is likened to a marathon rather than a sprint. Even if a vaccine is successfully developed in the short term, there’s still the need to take into account the amount of time required to manufacture and distribute the vaccines. Therefore, the current preventive and control policy may last for some time. Utilising limited financial resources to bring about the most effective economic support will be a challenge for many governments¹.

Although the Federal Reserve’s quantitative easing is keeping rates low for longer, we believe the next US government still needs an effective plan to increase revenue and reduce expenditures, thus adjusting government liabilities to more reasonable levels to shore up investor confidence in US Treasuries.

China to shift focus on infrastructure investment

Infrastructure development has long been the backbone of China's economic growth in the past three decades. We believe that infrastructure development will still play a key role under the new economic blueprint. But the types of projects may change. In the past, the focus was on construction of transportation and logistics infrastructure, such as roads, railways, ports and airports. In the next five to ten years, the focus will be the development of technology- and energy-related infrastructure¹.

The evolving US-China trade relationship has prompted the Chinese government to accelerate development of its technology sector. China also recently announced a plan for net-zero carbon emissions before 2060³. The move has helped raise awareness of sustainability and could accelerate the shift from fossil fuels to renewable energy sources such as wind and solar power. We believe this could open up additional potential investment opportunities in these sectors⁴.

Infrastructure development has also been a policy goal of recent US administrations. However, limited financial resources may constrain government investment in this sector. Additionally, infrastructure investment in the US is generally approved and funded by state and local governments rather than on a federal level. With most state governments facing severe fiscal deficits, any infrastructure project proposal would likely involve closer scrutiny and lengthy debates.

The revival of “Made in the USA”

During the elections, the policy pitches have focused a lot of attention on incentivising American companies to bring manufacturing back to the US. For labour-intensive manufacturing, this may not be cost-effective¹. In addition, relatively more attractive tax concessions are needed before companies would consider bringing production back from overseas.

From a Chinese perspective, traditional manufacturing over the next five to ten years may move overseas to Southeast Asia or other emerging markets because of rising cost. But if China’s economic upgrading can be carried out relatively successfully, the loss of traditional manufacturing industries could have limited impact on China's economy¹. The repositioning of the global supply chain from China to other emerging markets may also open up potential investment opportunities⁴.

Conclusion

Market volatility will likely persist as these political events unfold in China and the US. Instead of focusing on the short-term fluctuations, investors could consider taking a longer investment time horizon as they seek potential investment opportunities in these uncertain times.
 

1. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
2. Source: J.P. Morgan Asset Management, “China’s recovery on track”, 20.10.2020.
3. Source: Xinhua News Agency, “Xi Focus: Xi announces Chin aims to achieve carbon neutrality before 2060”, 23.09.2020.
4. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions. Provided for information only, not to be construed as investment recommendation. Investments involve risks, not all investment ideas are suitable for all investors.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.