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Keeping a Mindful Watch

Key Takeaways

  • Global portfolio diversification and asset allocation are important in managing potential volatilities as the global economy navigates out of the pandemic.
  • With a new US administration, Citi analysts generally expect less volatile relations between the world’s two largest economies of the US and China. However, it may be unrealistic to expect a Biden administration to reverse much of the Trump administration’s executive orders and actions. 





While Citi analysts are generally optimistic on the impending economic recovery, investors should remain mindful of political risks that could add to potential market volatility. 



  • US political changes are a big deal and there is much to absorb from Congressional results to determine what is eventually possible in terms of tax policy changes and government spending. Citi analysts note that a Biden victory may not actually reduce US policy uncertainty overall, just the chance of renewed trade tensions under President Trump.
  • With extensive foreign policy experience, President-elect Biden is expected to rejoin the Paris Agreement and engage multi-laterally with allies. However, the Senate is now the greater uncertainty as Senate elections are not final with the state of Georgia holding a run-off election on 5 January 2021 for two seats. Without a deep “blue wave” shift of many seats in US Congress, Biden’s ambitions on infrastructure investments, tax increases and income re-distribution are likely to be scaled back or delayed.
  • Citi analysts continue to think that a US-UK trade deal is likely over coming years with talks expected to begin post the US elections. However, in the event the UK reneges on its Brexit commitments, a trade deal is likely to be ruled out. 


  • Ahead of the UK’s departure from EU on 31 December 2020, Citi analysts expect a “bare-bones” trade deal to be agreed on, which in economic terms could only be slightly better for the UK than leaving with no deal under World Trade Organization (WTO) terms. Nevertheless, the symbolism is likely to be very positive, leading to further negotiations and likely sub-agreements after Brexit in areas like data sharing, state aid and the environment. 


  • Initial government and central bank responses were slow and insufficient as the first wave of the pandemic hit part of Europe like Italy very hard, with healthcare facilities very stretched. However, there has been government support, central bank support and increasing solidarity across the EU region. The EU’s €750 bn Recovery Fund was a landmark achievement, showing solidarity across the EU with €390 bn allocated to the weaker periphery countries, lessening Eurozone breakup risk. However, as the region is in the midst of a second COVID-19 wave, further support measures may be needed to support growth in the region. 
  • The US and France have reached an agreement to delay tariffs until after the US election with the aim for a broader solution to digital taxes at the Organization for Economic Co-operation and Development (OECD). However, other economies could continue to push for a digital service tax (UK, Italy), in which case tariffs by the US could be expected. If this is the case, the Office of the United States Trade Representative (USTR) may implement another Section 301 investigation into digital taxes by these other trade partners (UK, Italy, Austria, Turkey), and thus represent a potential catalyst for US-EU trade tensions to rise.  


Middle East:

  • The US has ratcheted up pressure on Iran since President Trump left the 2015 multi-party deal (Joint Comprehensive Plan of Action or JCPOA) that offered sanctions relief in return for caps on the Iranian nuclear program. President-elect Biden has said he wants the US to rejoin the JCPOA, if Iran ends its acknowledged breaches of the agreement. However, Iran’s Presidential elections in June 2021 are just one of the many barriers to a rapid return to the negotiating table.
  • The Abraham Accords signed between Israel on the one side and the UAE and Bahrain respectively, represent a significant breakthrough. After Egypt and Jordan, the UAE and Bahrain are the only third and fourth Arab countries to normalize relations. Investment and trade in services sectors could stand to benefit the most, while there is also room for an increase in goods trade as well.  However realizing this potential could take time with infrastructure needing to be established for large parts of the commercial relationships.


    • The Trump administration could potentially still pursue China-related policy actions before President Trump leaves office on 20 January 2021. While Citi analysts expect less volatile US-China relations under a Biden administration, it may be unrealistic to expect a Biden administration to reverse much of the Trump administration’s China-directed executive orders and actions. 

    Hong Kong:

    • China enacted the new National Security Law (NSL) in Hong Kong (HK) in 2020. The implementation of the NSL and three upcoming elections (Legislative Council in September 2021, electoral committee of the Chief Executive in 2021 and Chief Executive in February 2022), could keep politics in the limelight. Furthermore, Citi analysts think that it may be unlikely that President-elect Biden could reverse the executive orders on HK that President Trump has issued. The new US administration’s focus on human rights issues could also keep HK’s political developments on their radar. The Hong Kong Autonomy Act (HKAA) also stipulates an annual review of HK’s human rights and democracy situation, and the risk of secondary sanctions remain.

    North Korea:

    • In June 2019, US President Trump together with South Korean President Moon Jae-in briefly visited North Korean leader Kim Jong-un at the Joint Security Area, becoming the first US president to enter North Korea. However, efforts to negotiate an end to North Korea’s nuclear program appear to have made no substantial progress.


      • The diplomatic trade relationships between Australia and China has deteriorated in 2020. China has recently imposed various tariffs on Australian exports, while the long-term risk is that Chinese businesses could be wary of investing in Australia because of ongoing political uncertainty that could jeopardize their interests. Ultimately, Citi analysts think the prospects of a new US administration and the signing of the RCEP are unlikely to materially change Australia-China relations.






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