US Election is once every 4 years, but how does it impact the markets?

This post was originally posted here. The contributor to this article,@Denise is one of our many community members on InvestingNote.

update: Joe Biden wins the Presidency with 290 seats🎊

In the meanwhile, it could still be a period of volatility as the markets wait for a smooth transition (if there even is). So even though it seems like the President of the US has alr been highly-likely decided, it should be noted that there are still various ways the US Election can be contested.

Nevertheless, here are some macroeconomics principles that you’d be keen to know of:

[After all, this won’t be the last Presidential Election because there will always be another one every 4 years. Hence, the same factors would still apply.]

Just a quick backdrop:

On August 31st, 1957, diplomatic relations between Malaysia and the US were established when the US elevated its Consulate General in Kuala Lumpur to the status of the Embassy.

Also, The US is Malaysia’s third-largest trading partner!

The Trump VS Biden Presidential Election 2020’s turnout rate is the highest since 1990. It is also a period of volatility for the U.S dollar weeks leading up to and after the election takes place. Although it is proven historically that the US dollar tends to strengthen afterward, regardless of who wins.

So why does the US Dollar matter for Malaysia?

That’s because the weakening of the US dollar would mean a boost of the Ringgit’s strength.

Of course, there are also other reasons for a weaker greenback besides the volatility due to the US election:

– The Fed’s keeping interest rates near-zero
– Rising fiscal deficit
– Impact of covid19 on economic activities

What are some effects of a stronger ringgit?

It could result in higher capital inflows into Malaysia, as she continues to be an attractive investment destination. Malaysia could be seen in a position as a gateway to the ASEAN market by offering various incentives to foreign companies. Besides, the country was ranked 12 out of 190 economies by the World Bank in its Doing Business 2020 report, gaining three spots from the previous year. Such an outlook may increase the demand for the ringgit.

The graph below shows the chart of the currency pair USD/MYR since the start of the year.

A glance shows the US dollar weakening against the ringgit strengthening amidst the months leading up to the election.

So what’s the deal of having a strong local currency? Well, here are some reasons why:

Conversely, if the ringgit weakens, it would affect such companies.

An example would be CSC Steel Holdings Bhd.

The group saw their earnings fall by 78% in its final quarter of FY2016 because of a substantial rise in production cost which was caused by a higher cost of raw materials exacerbated by the rapid weakening of the ringgit against the greenback.

But is a stronger ringgit always good for Malaysia? Here’s why not:

Moving on from the currency pair, are there other factors of the US Presidential Election that could impact Malaysia, in ways big or small?

Well, the following could happen under the presidency of Trump or Biden:

It should be noted that The US (in general) has at times condemned the Malaysian government for its weak human rights protections, shortfalls on tackling human trafficking, limitations on press freedom, and prosecution of opposition political leaders like Anwar Ibrahim.

A case in point: In recent news, The US imposed a ban on palm oil imports particularly from FGV Holdings bhd because the US Customs and Border Protection claimed that FGV allegedly used forced labor.

Thus, Malaysia will have to be even more cautious regarding such issues especially in areas of palm oil and environmental degradation under Biden’s helm.

On the brighter side, the restrictions imposed on Malaysian palm oil products by the US do not have much impact on the sector because FGV only exports 40 tonnes of palm oil to the US.
For comparison, Malaysia exported 292,940 tonnes of palm oil to the US during the May-September 2020 period compared with 292,011 tonnes for the same period in 2019.

Closing Thoughts:

Overall, the US election results should have little impact on the Malaysian economy in the near term.

But still, that does not mean we should take the US Presidential Election lightly either, as it has consequences for the global economy one way or another.

Personally, from Asia’s perspective, a Biden victory would be viewed more favorably than a Trump win. All that’s left now is to wait for the outcome of the US Presidential Election 2020; and stay out of the stock market in the meantime during uncertainty. 📈

Monday’s gonna be a busy day for the world.

Once again, Congratulations Joe Biden!