Singapore. The outcome of this year's US midterm elections has a major influence on the investment decisions of professional investors. This could have particularly strong consequences for the Asian stock markets.
A complete victory for Democrats in both chambers of Congress could lead to stricter control of the AI industry and the expansion of data centers. This could have negative consequences for Korean and Taiwanese chip manufacturers such as TSMC, Samsung or SK Hynix, who as suppliers benefit from the expansion of data centers there.
According to strategists, these companies would benefit from an unexpected Republican majority - which would also mean more political continuity. “If Democrats win a landslide next week, these issues could gain more urgency and these fears could trigger a further decline in AI stocks,” said Phillip Wool, head of portfolio management at Rayliant Global Advisors.
“Anything that poses a threat to AI will weigh heavily on sentiment towards stocks from Korea, Taiwan, Japan and perhaps to a lesser extent China.” This dependence could leave the region vulnerable if a Democratic-dominated Congress tightens control over the industry.
Is the regulatory framework for data centers changing?
Possible areas of focus include requiring AI developers to cover a larger share of data center electricity costs and greater congressional oversight of trade and technology policy. In addition to the large semiconductor manufacturers, this could also affect companies such as Quanta Computer, Advantest and Delta Electronics.
“Possible changes in U.S. AI infrastructure expansion, data center development or technology limitations could ultimately impact Asian supply chains,” said Afdhal Rahman, executive director of wealth advisory at Oversea-Chinese Banking Corp.
Still, investors generally expect global demand for AI computing power and infrastructure to remain stable regardless of who controls Congress. Korean and Taiwanese chipmakers remain an integral part of these structural investments, making them well-positioned to weather diverging election outcomes, said Pruksa Iamthongthong, head of APAC equities at Aberdeen Investments.
The consequences for Chinese companies
If the Democrats clearly win the midterm elections, this could also give a boost to Chinese manufacturers of solar systems, batteries and electric cars. The Democrats are placing greater emphasis on clean energy, says Wool from asset manager Rayliant. The focus is on the battery manufacturer CATL, the car manufacturer BYD and the solar companies Sungrow, Longi and Jinko Solar.
But there is also a counter-scenario. If the Democrats control Congress, President Trump can achieve little in domestic policy. He is then likely to rely more heavily on powers that do not require parliament, and this includes trade policy. Wei Li, head of multi-asset investments at BNP Paribas Securities (China), believes tariffs are the factor through which the election moves prices the most. Under a divided government, he sees scope for further escalation in the trade dispute.
Other experts expect only limited consequences for Chinese stocks because the tough stance towards Beijing in the USA is supported by both parties. In addition, China's broader presence in export markets and its growing technological strength protect it to some extent from policy changes in Washington, says June Chua, head of Asian equities at Manulife Investment Management.
The Japanese perspective and the foreign exchange market
The topics of geopolitics and oil are particularly relevant for Japanese investors. Kazuyuki Muramatsu, head of investment management at Nagomi Capital, does not expect the stock markets to rise after the election as usual. Trump has suggested that the US could resume attacks on Iran after the vote.
If the oil price then rises to $120 per barrel, that would override any positive expectations, says Muramatsu. If, on the other hand, the Republicans retain the majority, according to Wei Li from BNP Paribas, Japanese defense companies and industrial companies with close US ties could benefit because the spending priorities would be maintained.
The election could also leave its mark on the foreign exchange market. Richard Franulovich, chief foreign exchange strategist at Australian bank Westpac, believes it is possible that the dollar will give back its recent gains. This would be the case if the Democrats win both chambers, a compromise between the USA and Iran emerges or spending on AI and data centers is viewed more critically. Close results with recounts or lawsuits could also weaken trust in US institutions.
Commonwealth Bank of Australia strategist Carol Kong expects a Democratic Congress to curb new debt, ease pressure on U.S. interest rates and weigh slightly on the dollar. If the Republicans lose by more than expected, the dollar could fall more sharply and the yen could be in demand as a safe haven. Lower U.S. yields and less room for spending could help Asian exporters and local currency bonds, according to Li.
