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Asia: Leadership Stability (For Better or For Worse)

May 18, 2017 | Multi-Asset

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During a recent trip to Asia, many insights were gained concerning the region's political environment. It remains relatively stable, but as always, the influence of policy change can be for better or for worse.

Stability of Local Politics

Notably, our research trip confirmed our view that Asia's political environment remains relatively stable on an absolute basis, and especially stable relative to the West.

Populism, one of our macro themes, has precipitated uncertainty in the United States and Europe, where a few elections are yet to come (Germany and Italy). However, Asia's exposure to this populist movement has been muted. It is likely that most of the current prominent leaders will remain in power for at least a handful of years to come.

India. Since taking office in May 2014, Prime Minister Narendra Modi has embarked on a program of development that has made him very popular with citizens. And with no term limits placed on his office, he looks to have a long runway ahead of him.

China. Xi Jinping, who was elected president of the People’s Republic of China in March 2013, will certainly stay in office for five more years, and more likely 10 or 15.

Japan. Prime Minister Shinzo Abe's second term expires in 2018, but the country's ruling Liberal Democratic Party has revised its party rules to extend the presidential term limit from two to three, giving Abe a strong chance at a third term, meaning four to five more years in leadership from today.

Philippines. Rodrigo Duterte became president in May 2016, so with his six-year term, he will be in power until 2022.

Malaysia: Najib Razak, who was sworn in as prime minister in April 2009, remains powerful while his opposition remains weak. He is likely to call for an election, and win it, later this year or in 2018.

South Korea: Park Geun-hye was South Korea's first democratically elected leader to be forced from office when ousted by a corruption scandal in March 2017. With the election in May of Moon Jae-in, we have now seen a shift to the center left with a fresh five-year mandate.

There is always some potential for social unrest in Hong Kong.

Hong Kong: There is always some potential for social unrest in Hong Kong as the country navigates the “one country, two systems” governance model. And, in the most recent election, the local favorite, Tsang, did not win, despite leading polls by a significant margin. Still, winner Carrie Lam seems credible, and protests were quite minor on election day.

For Better or For Worse

Despite leadership stability, as always, the influence of policy change can be for better or for worse and we continue to assess the dynamic opportunities and risks in this regard across the region.

Partnership in play. Asian countries continue to assess how to form coalitions on global trade. China and the United States are the most influential players in the region, but with uncertainty about the policies of the new U.S. administration, there has been an impetus to “wait and see” and in the meantime to turn to one another. In addition to looking within the region for trade, a less certain trade backstop has also created an incentive and opportunity to further focus on addressing structural domestic issues.

China used more cement in a few years than the U.S. used in the entire 20th century.

Urbanizing China. In China, there is a continued push toward urbanization. The government just announced the location for a special economic zone near Beijing that will be three times the size of New York. The physical infrastructure continues to rapidly evolve—in fact, China used more cement in a few years than the U.S. used in the entire 20th century. The recent housing frenzy has also led to numerous administrative measures associated with real estate—around 100 in March alone. Abnormally high savings balances are shifting to property. It will be interesting to see how this plays out.

Long-term uncertainty in Malaysia. Malaysian President Najib, who, in the likely lead-up to an election, will solidify his power, is pursuing the opening up of trade with China and India as well as increasing investment in infrastructure. Short term, that's a nice positive for Malaysia, but my concern remains in the long term. If we end up with a situation like the one in Turkey, where President Recep Tayyip Erdogan is carrying out the harshest crackdown in decades, the prospects for growth and investment will rapidly deteriorate.

Vietnam's fiscal pressure. Vietnam's fiscal debt is near its established limits. This creates an incentive for the country to reform by selling off some state-owned companies to raise capital. This, in turn, could also lead to increased interest and liquidity in Vietnamese markets over the longer term. The country had been set to benefit from the Trans-Pacific Partnership (TPP) and is particularly hurt by the U.S. withdrawal.

Japan's third arrow. The third arrow of Prime Minister Shinzo Abe's “Abenomics” is structural reform, which is typically the most difficult and elusive. Attempts at structural reforms in June 2013 failed to unleash growth. But, there are reasons to think incentives for reforms are increasing. One reason is demographics. As Japan's population ages, its workforce is shrinking, creating distortions in the construction, medical, and services sectors that will need to be addressed.