Early results point to a strong showing for Democrats1, raising the prospect of Democratic control of Congress, ending two years of unified Republican government in Washington. For APAC investors, the question is whether changes in Washington will change the forces driving regional markets. The answer may be less than you might think.
Start with the election itself. Midterm elections have historically been difficult for the president’s party. Over the past six decades, that party has lost an average of 22 House seats in the midterms2. Only twice over that period, under Presidents Bill Clinton in 1998 and George W. Bush in 2002, did the president’s party gain House seats. So, while the result may feel consequential, political change in a midterm election is hardly unusual.
Still, Democratic control of Congress will make it harder for the White House administration to pass major partisan legislation. That could reduce the prospect of significant additional fiscal stimulus over the next two years.
For Asia, the implications matter. Less fiscal stimulus could reduce upward pressure on US growth, inflation and Treasury yields, potentially easing some of the pressure that higher US rates and a stronger dollar have placed on Asian currencies and monetary policy.
But congressional gridlock does not mean policy paralysis. The administration retains considerable executive authority, particularly in areas with direct implications for APAC.
Trade remains the key risk for Asia
Most importantly, we would not expect the election to fundamentally alter the broader US and China relationship.
Tariffs, export controls, technology restrictions and supply-chain security are therefore likely to remain important sources of uncertainty. China remains the most directly exposed, while Taiwan and Korean markets are particularly sensitive to trade dynamics, as well as the global semiconductor and AI cycles.
Elsewhere, the picture is more nuanced. India and parts of ASEAN could continue to benefit from supply-chain diversification, although growing trade surpluses also leave some economies vulnerable to greater US scrutiny.
Asia is not one trade
The election reinforces the importance of selectivity across APAC. For China, domestic policy, earnings and the growth outlook may ultimately matter more than the election result itself. For Japan, US yields and the dollar remain important for the yen and the path of monetary normalization. For emerging Asian economies, the direction of US rates and the dollar will influence currencies, capital flows and how much room central banks have to ease.
To sum, the mid-term results have not fundamentally changed the APAC investment regime. For regional investors, the key variables remain US rates and the dollar, China’s growth outlook, trade and technology policy, and corporate earnings. The votes are in. Now it’s back to the fundamentals.
