Nov 11, 2016

Donald Trump's US presidential victory raises challenges for Asia, including a possible near-term hit to confidence and growth and new tariffs on imports. Tumult in financial markets may prove very short-term. However, if US growth suffers under Mr Trump, US interest rates may only rise gradually and the dollar may weaken. This outcome would support Hong Kong property assets, since it would mean that negative real interest rates persist. However, dollar weakness would hurt Asian exporting nations, notably Japan where property investment volumes have already been affected by the dull economy and strength of the yen. Direct implications for the property markets within developing Asian countries such as China and India are more limited. In the long run, we expect the combination of Trump's victory and Brexit to remind global investors and property occupiers of the potential for shocks in developed as well as emerging countries, and so mitigate political and economic concerns about Asia. This should lead to higher demand for Asian financial assets including property over time.

Trump's victory surprises global financial markets
At first sight Donald Trump's unexpected victory in the US presidential election raises many challenges for Asia, including a possible near-term hit to US and global confidence and growth and radical trade policies targeting China and other countries. We have already seen some of the implications today in falling Asian stock markets and a strengthening of traditional safe haven assets such as gold and the Japanese yen.

It is possible that the turbulence in financial markets today will prove very short-term; right now there are few grounds to believe that politically-driven tumult in the markets after the election will lead to any long-run declines or recession in the US.

At first sight, Trump's policies will hold down Asian growth
However, now that Mr Trump has won, we must start to examine his policies. Mr Trump has many radical policy proposals, but it is unclear which of them he will actively promote first. Domestically, Mr Trump has suggested that he will press for large-scale fiscal austerity and tax reductions while, regarding foreign policy, he has suggested that he will press for tariffs of up to 45% to be imposed on imports from China and other countries.

In office, Mr Trump may prove less radical than his policy proposals suggest. That said, elections for 34 of 100 seats in the Senate and all 435 seats in the House of Representatives were held on the same day as the presidential election. The outcome has been very good for the Republican Party, which has regained control of the Senate and retained control of the House of Representatives. If Mr Trump does face opposition to his policies, it will have to come from within his own party.

Certain respected forecasting houses believe that Mr Trump's policies will have a contractionary effect on US growth. In its "moderate Trump" scenario, Oxford Economics posits tax cuts of USD1.0 trillion, spending cuts of USD750bn and tariffs against China of 15%. This outcome would have a limited negative impact on US growth and marginal effect globally. In its "adverse Trump" scenario, Oxford Economics posits tax cuts of USD1.0 trillion, front-loaded spending cuts of USD1.0 trillion and tariffs against China of 45%, with additional tariffs on South Korea and India. This outcome would have a significant negative impact on US growth and materially reduce growth prospects in Asia.

Slow US interest rate rises would support Hong Kong property
We have been assuming that the US Federal Reserve will raise interest rates again this December, as it has already signalled it plans to do. Thereafter it will push up US interest rates steadily over the next few years. However, if US growth does suffer under Mr Trump, then the Federal Reserve may only raise interest rates very gradually over the next few years, and possibly barely raise them at all.

This prospect has positive implications for property assets in Hong Kong, because Hong Kong interest rates are effectively tied to US rates as a result of the territory's currency peg. Hong Kong has enjoyed negative real (i.e. inflation-adjusted) interest rates since late 2009, and as a result has enjoyed what we would argue are the loosest monetary conditions in Asia. This prolonged period of easy money has coincided with an increase in residential property prices of roughly 200%. On the assumption that US interest rates only increase gradually and that inflation in Hong Kong stays constant, we do not expect Hong Kong to return to positive real interest rates before early 2018, and possibly H2 2018.This outcome should support capital values across most segments of the Hong Kong property market, although residential prices will remain vulnerable to further tightening measures similar to the harsh stamp duty increases announced by the government last week.

USD weakness would hurt Japan and other Asian exporting nations
If US economic growth suffers and US interest rates increase more slowly than we have assumed up to now, the US dollar may also start to weaken after many years of strength. This scenario would be negative for Asian exporting countries, notably Japan where the domestic currency is already very strong (see Fig.1), but also China, South Korea and Taiwan. This is because a weaker dollar would reduce the competitiveness of their exports, compounding the impact of possible weaker US demand and new tariff barriers.

We should add that the weakness of the domestic economy and the strength of the Japanese yen have already taken their toll on investment volumes in the Japanese property market. According to Real Capital Analytics (RCA), over the first nine months of 2016 total investment transactions for income-earning properties in Tokyo fell by 34% y-on-y to USD13.0 billion; this was the second largest decline among major global cities after London. If the yen continues to strengthen, foreign investors may increasingly find themselves priced out of Japanese property markets.

Direct implications for Asian emerging countries are limited
Direct medium-term implications of Mr Trump's victory for the property markets of developing Asian economies are more limited. China and India are experiencing strong secular growth which is unlikely to slow sharply for the next few years. Investors and large multinational occupiers should continue to be attracted to important commercial property markets like Shanghai regardless of who is US president. Meanwhile, demand and supply in the Chinese and Indian residential markets are driven largely by domestic factors such as urbanisation, wealth levels, interest rates, lending policies and real estate regulation which have little to do with the US.

Trump and Brexit surprises should lower concern about Asia over time
Perhaps the most important implication of Mr Trump’s victory for Asia lies in the long term. In combination with this year’s unexpected vote in the UK for Brexit, i.e. departure from the European Union, the success of an anti-Establishment candidate in the US should remind global investors and property occupiers of the potential for shocks in developed as well as emerging countries. Since the Global Financial Crisis, US financial assets have been in high demand and the US dollar has been strong. This has been reflected in heavy capital outflows from Asian real estate and stagnating capital inflows over the past eight years. Despite possible near-term volatility in emerging markets, we believe that the twin developed market shocks this year of 2016 will mitigate long-standing political and economic concerns about Asia, and lead to higher demand for Asian financial assets including property over time.


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