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How will Trump 2.0 affect Asia's emerging markets?

While China faces renewed pressure under a second Trump term in the White House, structural growth drivers and attractive valuations across Asia may present opportunities.
How will Trump 2.0 affect Asia's emerging markets?

The prospect of Donald Trump's second stint as US President has sent ripples through Asia's emerging markets, with investors carefully weighing both challenges and opportunities in what could be a dramatically changed investment landscape.

Martin Hennecke,
St.James's Place

"The US election result will not change the fact that, in case of an inflation uptick induced by tariffs and other factors, the Federal Reserve may have more limited room to manoeuvre on interest rates than generally thought,” said Martin Hennecke, head of Asia investment advisory at St. James's Place Asia and Middle East.

Annual interest costs of $1.13 trillion this past fiscal year represented a year-on-year rise of 29% for the world’s largest economy, while its budget deficit hit $1.83 trillion, Hennecke observed.

The macro environment is creating distinct currency and fixed income dynamics, according to Colin Graham, co-head of sustainable multi asset solutions at Dutch asset manager Robeco.

Colin Graham
Robeco

"US dollar strength will continue due to favourable interest rate and growth differentials, while emerging currencies will remain under pressure in a stronger US dollar trend," Graham told AsianInvestor.

ALSO READ: Market Views: Will Trump's triumph affect US interest rates outlook?

The immediate post-election period calls for careful positioning, Graham added, while near-term caution is warranted in light of policy uncertainties potentially leading to market volatility.

CHINA TRADE TENSIONS

While China naturally dominates the conversation around emerging market reactions to Trump's victory, reality may be more nuanced than headlines might suggest.

The world's second-largest economy has significantly diversified its trade relationships since Trump's first term, according to Hennecke.

"Only 15% of Chinese exports went to the US in 2023, as trade with many other countries has been growing strongly, and not all companies are export dependent in any case, whilst valuations specifically for Hong Kong-listed Chinese firms are amongst the lowest in Asia as well as globally," he said.

“Moreover, manufacturing, housing and services all showed signs of stabilisation in October against the backdrop of stimulus measures being rolled out," he added.

ALSO READ: Market Views: How will US elections impact China's markets?

Devan Kaloo
abrdn

The Chinese response to potential trade pressures could create investment opportunities, with Beijing likely to take proactive measures to support domestic growth.

Historical evidence from Trump's first term suggests that initial market fears might be overdone, according to Devan Kaloo, global head of equities at abrdn.

"Under Trump's presidency, China would likely face higher tariffs, putting more pressure on Chinese exports. There is, however, a silver lining. Trump's victory is likely to prompt the Chinese government to ramp up domestic growth efforts," Kaloo told AsianInvestor.

“Similarly, it is possible that with a more transactional US President, the US and China could arrive at some mutually beneficiary agreement; we should remember the first Trump presidency did see the Chinese equity market outperform.”

BEYOND CHINA

Other market observers also point to potential opportunities arising from increased trade tensions.

India, in particular, could emerge as a beneficiary of any realignment in global trade flows, according to Ray Sharma-Ong, Southeast Asia head of multi-asset investment solutions at abrdn.

"India benefits from strong domestic economic growth, low exposure to potential trade conflict due to low export-to-GDP ratio and a tilt towards services exports, supported by strong earnings that are not reliant on tech, and strong domestic flows anchoring the markets," Ong said.

Ray Sharma-Ong
abrdn

The broader emerging-markets story remains compelling, with several structural growth drivers that transcend political cycles in developed markets, the analysts said.

"While a world of rising tariffs is not great for Emerging Markets, a stronger US economy is supportive for many companies and countries," said Kaloo.

"There are also several long-term structural tailwinds that underpin EM attractiveness, these include a pickup in global industrial capex, an ongoing technology revolution, and a growing number of companies that are improving shareholder returns," he added.

Hennecke at St. James’s Place believes that the key for investors may lie in maintaining perspective and avoiding an overreaction to political headlines.

"We do not suggest that investors engage in knee-jerk reactions such as blanket China stock selling, and strongly advocate for diversification – a notion which might be regarded as somewhat boring but has proven to be very effective over time," he advised.

"Whilst the US is currently most popular, Asian and emerging markets [equities], as well as Japan and Europe do all trade at very reasonable valuations currently and should not be overlooked and discounted."

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