US midterm elections: What it means for Asia

The Democrats have won control of the House while the Republicans have retained the Senate. With markets expecting a divided Congress, the initial post election reaction is likely to be subdued.

Nov 2018

Under a split Congress, political gridlock suggests that there will likely be limited changes to US taxes and spending. This implies that US growth would continue to moderate going into 2019, but remain relatively healthy, as the boost from last year's fiscal expansion fades. While a major spending program is out of the picture, an infrastructure bill could potentially be on the table given bipartisan support. If it passes, it will be positive for growth in the US.

The US equity market tends to perform well following the midterm elections with annual returns from the S&P 500 stronger than the annual average market returns1 That said, the fiscal and political backdrop is very different today.

A split congress could be potentially disruptive when 2019's fiscal deadlines draw near, given the likelihood of limited policy action to raise the debt ceiling. As a reminder, the US debt limit is currently suspended through March 1, 2019, following which the debt limit gets reset to the existing amount of debt outstanding on March 2, 2019. The "hard" debt ceiling may bite before fiscal year end in October 2019 given swelling deficits and increased Treasury issuance. As such, the Congress must raise, suspend or repeal the debt ceiling. While noise over the debt ceiling could raise market uncertainty and political risk premium, this is likely to be a mid-2019 story.

Implications for Asia

With Asia being more sensitive to Chinese growth and US financial conditions, the impact of the midterm elections on trade, the Federal Reserve (Fed) policy and the USD bears watching. We address each of these below:


With President Trump having executive authority over trade policy, the outcome of the midterm elections is unlikely to have a large impact on the current trade negotiations. Notably, there is bipartisan support for being tough on trade although there may not be full agreement on the methods used.

US stocks with high China sales as well as China stocks with high US sales have underperformed their peers since the US-China trade tensions began2. This suggests that the market has increasingly priced in a continual trade conflict. As such, a trade deal by President Trump and President Xi in the coming months would be a positive surprise for the markets, especially for Taiwan, Singapore and South Korea - markets that play an important role in China's supply chain.

If the US however chooses to increase the tariff on USD200 bn of Chinese imports from 10% to 25% in January 2019, this is estimated to lower China's growth by 0.5%. This could in turn drag global growth by 0.2%.3 That said, China's recent moves to ease credit to the private sector and increase infrastructure spending is expected to help stabilise its growth going into 2019.

Fed policy

The Fed is likely to remain data dependent regarding the path for interest rates and the pace of balance sheet unwind. With US growth moderating but still healthy, the Fed is poised to continue raising rates gradually going into 2019. What could potentially change this narrative is if the Democrats raised minimum wages, which will have an impact on inflation.


Any tightening of US financial conditions is likely to adversely impact the financial conditions in Asia. Given the lowered probability of a major stimulus, the USD will not be as strong under a split Congress. This potentially grants some respite to the Emerging Markets, including Asia although their currencies and markets have already corrected substantially (See Figure 1).

Fig. 1: Asia currency and market performance (5 March – 5 November 2018)4

A more benign outcome

A split congress suggests a relatively more benign outcome for Asia and the Emerging Markets, than if the Republicans had retained control of both the House and the Senate.

With the US midterm elections out of the way, investors are likely to refocus on economic fundamentals, earnings and central bank policies.

Market volatility is likely to increase further in 2019 as quantitative tightening runs its course and investors fret over "peak" growth scenarios. This provides opportunities for long term investors particularly in Emerging markets and sectors which have sold off despite favourable fundamentals. At the same time, investors should continue to build diversified exposures using multi asset and low volatility strategies for added downside protection.

1Source: Bank of America Merrill Lynch. 31 October 2018. Annual returns from 1952.
2Source: Goldman Sachs. 29 October 2018.
3Source: Citi Research estimates. 1 October 2018.
4Bloomberg. As of 7 November 2018. Currency performance against the USD. Market performance is in local currency terms.

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