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Written by: Value Partners Group
Following Donald Trump’s win as the US president, we expect his policies to revolve around trade policy uncertainty, including higher tariffs on imports, deregulation, and tax cuts. These could lead to higher inflation and higher-for-longer interest rates in the US, as well as a stronger dollar.”
We outline below several key scenarios under this environment:
A boon for Asia:
For China, although Donald Trump’s tariffs would negatively impact the country’s sizable export segment, Chinese policymakers could exceed expectations on fiscal and monetary stimulus in 2025, especially given the government’s clear messages in 2024 in boosting the economy. These measures shall aim at offsetting the impacts of Trump’s tariffs and help the domestic economy. This has happened before during Trump’s first term as president when the China-US trade frictions started in 2018. At the time, Chinese policymakers rolled out measures to support weak exports and domestic demand.
At the same time, Trump’s assertive position towards China may accelerate the supply-chain diversification or the “China-plus-one” strategy (e.g., adding manufacturing bases in other countries besides China). This could potentially be positive in Southeast Asia, where certain markets have competitive production and labour costs (Figure 2). In addition, China’s export exposure to various markets has become more diversified, with more than 40% of exports going to other emerging markets, including Asia (Figure 3). Hence, the impacts of the increase in tariffs might not be as harsh as many had thought.
Alternatively, Trump may come to the table to negotiate trade, such as the US-China Phase One trade deal signed in 2020, which allowed both countries to grant various tariff exemptions on select goods. A surprise deal like this should be a positive surprise for the market.
A bane for Asia: Another scenario that investors should monitor is that in addition to hard tariffs imposed on China, Trump also slaps tariffs on goods produced from other Asian countries that have China as part of their supply chain or value-added. Export-oriented economies, which make up a large portfolio of the Asian equity market, would suffer under this scenario as investors cut back on valuations of the market.
Additionally, Trump’s tariff policies would lead to higher inflation in the US and, therefore, a stronger US dollar, which tightens the room for further monetary stimulus by central banks in Asia. Although the higher degree of uncertainty may lead to more market volatility in 2025, opportunities remain in the Asia market. Market valuations remain cheap relative to many other markets, especially in the US, and global investors continue to be under allocated in the region. While a strong policy response from Asia to offset any negative impacts from policy changes in the US warrants a cautiously optimistic outlook for Asian assets, a strong focus on security selection could generate good returns and at the same time manage risks.
However, although inflation has moderated, it is expected that Trump’s policies could be inflationary, limiting the room for the Fed to materially loosen further. Additionally, the strong US economic and inflation data has added uncertainty to the extent of the rate-cut path, with investors already cutting back their expectations on rate cuts for 2025 (Figure 4).
Related: Navigating Earnings Season: Are Tariffs Really That Scary?