Asian economies, particularly China, are expected to take a hit in 2025 as domestic-centric policies are implemented in the U.S., but institutional investors are better prepared this time, and China has countermeasures up its sleeve, fund managers said.
U.S. President-elect Donald Trump has promised to impose as much as 60% tariffs on imports from China and up to 20% tariffs on goods from other countries. In November, he said he would add 10% tariffs on imports from China and 25% on items from Mexico and Canada.
Money managers agreed that the tariffs, along with his anti-immigration policies, will likely have an inflationary effect in the U.S. and a stronger dollar against Asia’s currencies, which will affect trade and lead to poor equity performance in the region.
At the same time, some of Trump’s other policies, such as lower corporate tax rates, could lead to stronger corporate performance in the U.S. and likely boost the stock market, driving investors to U.S. equities.
Already, institutional investors such as BlackRock have an overweight to U.S. equities for 2025, and flows into U.S. stocks have risen $109.4 billion in the month since Trump was announced the winner in the election, while emerging markets saw outflows of $15.9 billion, Bloomberg reported on Dec. 2.
That said, Trump may not implement the full 60% tariffs on Chinese goods and could instead use the threats of increased tariffs as a bargaining chip, sources agreed.
“There's the constant discussion around rhetoric vs. reality,” said Nick Wilcox, London-based managing director for discretionary equities at the $174.9 billion Man Group. “What we saw back in 2016 was a difference between Trump’s pre-election rhetoric and enacted policy.”
There is a general consensus around the potential for a stronger dollar, higher yields and a shallower cutting cycle that investors are digesting at the moment, allayed with a pro-business stance, he said in an interview during a recent visit to Singapore.
Asia's opportunities
Despite the threat of tariffs, some Asian markets are well positioned to withstand the headwinds, money managers said.
“We see Southeast Asian economies, along with China and India, as potential beneficiaries as the performance gap between Asia ex-Japan and global markets starts to narrow. Within the region, we think Indonesia and Malaysia present more opportunities than others but — as ever — we look to build our portfolio from the bottom up and assess each company on its individual merits," Wilcox said.
Economies that are more insular and reliant on internal demand will be more sheltered from the tariffs and geopolitical risks, said Ecaterina Bigos, Hong Kong-based CIO of core investments for Asia ex-Japan at AXA Investment Managers.
“India is one of those economies, and I would say probably Taiwan has scope to fare better, because of the (global) unwinding and decoupling of some of the supply chains,” she said.
“It's a desire of the U.S. to diversify, but it's going to take time, and some of it probably is going to be quite impossible to do. And Taiwan sits in that line of strategic position where, of course, a large part of the chip manufacturing, particularly the advanced chip manufacturing, is still being built in Taiwan,” she added.
Bigos also acknowledged that the CHIPS and Science Act, signed into law in 2022, has sought to bring the chip supply chains back to the U.S., and semiconductor factories have opened in other countries such as Japan. But it will take time for these manufacturing facilities to scale.
She added that increased tariffs on Asian imports into the U.S. will create downward pressure on local currencies, so export-oriented countries like South Korea and those in Southeast Asia will be most affected.
In addition, recent political turmoil have contributed to headwinds in South Korea, she said.
South Korea's Constitutional Court is now deliberating on parliament’s recent impeachment motion against President Yoon Suk Yeol after he declared martial law in early December, before lifting it within hours. If he’s ultimately ousted, South Korea must hold an election within 60 days.
“These now add to increased internal uncertainty, diverting policymakers (from their) focus on addressing growth headwinds. Growth is expected to be impacted by the continued cyclical weakness in the global manufacturing sector, semiconductor exports growth moderation, downside risks to auto exports, and the uncertain outcome of the likely U.S. tariffs,” she said.
Impact on China
Among Asian countries, China is expected to suffer the brunt of Trump’s policies, plus the country is facing cyclical headwinds that have slowed growth. However, investors should not underestimate China’s countermeasures to U.S. tariffs and fiscal stimulus that Beijing has yet to roll out, sources said.
“I think we have to break down a little bit in terms of where China is in the growth trajectory. And ultimately, it's that its growth is trending lower. It's still going to be positive on a relative basis to developed markets, but it's trending lower,” Bigos said.
The cyclical headwinds that China is facing include deflation both on consumer and producer price indexes, “substantial imbalances” related to leverage in parts of the economy, and the property market being very subdued, she said.
China's consumer price index rose 0.2% year-on-year in November, and fell 0.3% month-on-month, while its producer price index fell 2.5% year-on-year and rose 0.1% month-on-month.
Bigos expects exports and manufacturing to be positive toward the end of 2024 as global partners “front-load” orders in anticipation of the upcoming tariffs, but 2025 will likely be met with challenges.
Additionally, the real estate market, which has driven growth in China over the past few decades, will unlikely have as big a part to play in the Chinese economy in the future, further dampening China’s growth trajectory.
“Certainly, we know the challenges with real estate and developers, the leverage, misallocation, and then, of course, the yield on some of the infrastructure projects is not as it used to be in the past,” Bigos said.
The real estate market will play a different role to China’s growth, particularly as the population ages and the government has been firm on its stance that property is for living, not for speculation, Christy Tan, Singapore-based investment strategist with Franklin Templeton Institute, said in an interview.
But there have been signs of stabilization, she pointed out. “The year-on-year decline in total sales by floor space has slowed. And I think that's quite encouraging. The November data also looks promising, especially in tier-one cities,” she said.
Another positive sign is the cut in mortgage rates and down payment requirements that the government rolled out as part of its stimulus measures in September, she said.
“Now, whether or not this will be sustained, I think that remains to be seen ... I think we will look at the property sector as probably on a slow L-shaped recovery path,” she added.
Sentiment among investors was also boosted after China in early December signaled a shift to looser monetary policy in 2025 to drive consumption and pledged to stabilize the stock market and property sector.
China's countermeasures
The 60% tariffs that Trump has threatened on China, if enacted, will not have as big an impact as people anticipate, Tan said. “We do think that China is not going to just sit there and allow tariffs to be imposed and implemented just like that,” she said.
The magnitude of China’s response will be dependent on the extent of tariffs imposed, she said. “One of the policy responses will definitely be of, essentially, a similar amount, right? But, of course, I think that is the worst-case scenario, and also that might not be sufficient to offset (the impact) because the number of goods that are traded between the U.S. and China are essentially not of the same balance.”
“On top of response in terms of tariffs on U.S. goods, other things could include more stimulus into the Chinese economy such as more export rebates for Chinese exporters. It will be a multi-ministry effort,” she said.
“We could see the Ministry of Finance introducing more fiscal stimulus and we do expect the People's Bank of China to perhaps eventually allow the currency to weaken to offset some of this tariff’s impact. We saw this during the 2018 and 2019 trade tensions,” she explained.
Tan added that China has diversified its export partners, so it is less reliant on the U.S. as it used to be. “Between 2018 to October 2024, exports to Mexico from China rose 141% and exports to India rose 61%, exports to Vietnam 88%, and exports to U.S., 24% ... And if you look at flows of payments, there has been a significant rise, notably in terms of flow of payments, of dollars between China and Latin America,” she said, citing data provider Macrobond Financial.
“It definitely shows that we are looking at growth in peripheral trades between China and the rest of the world. So, in fact, the trade deficit between U.S. and China is now smaller than that of China and the rest of the world, right? So that gives us some comfort that some of these tariff impacts could be offset,” she added.
Asia credit
Even though the China portion of Asian credit portfolios has reduced significantly — partly because loans have been removed from the benchmark — Asia credit had a decent year, said Louis Luo, Hong Kong-based senior investment director at the £506 billion ($644.5 billion) abrdn.
In 2021, index providers such as S&P Dow Jones Indices removed several Chinese companies from their benchmarks after the Trump administration in late 2020 banned U.S. investors from trading Chinese companies accused of having ties to the military.
China's weighting in the JP Morgan Asia Credit Index (USD) has also fallen to 32% as of September from 52% in 2019.
“The interest rate component has been volatile, but the credit spread has tightened, so the total return is decent,” he explained. “Looking ahead for next year, the base cases were for Asia credit in general to be more of a carry asset. But we don't expect further significant tightening of the spread from current levels.”
“However, if that interest rate component continues to drift lower because of the Fed cuts, you will still have that capital gain from the yield component. So your all-in yield can still drift lower than the carry, plus that small capital gain from the U.S. Treasury component, means it's still a decent carry asset to own,” he said.
He noted that the extent of tariffs imposed on Chinese imports to the U.S. and concerns over recession are risks to Asian credit. A weakened labor market in the U.S. suggests recession risk, which would affect demand for Asia imports, for instance.
Andrew Jackson, head of fixed-income boutique at the 225.9 billion Swiss francs ($257 billion) Vontobel, added that emerging markets fixed income has done well in 2024 but flows have not reflected the performance.
For instance, the J.P. Morgan EMBI Global Diversified index rose 8.05% year-to-date as of Nov. 29, and the J.P. Morgan CEMBI Broad Diversified Core index increased 8.22%. Comparatively, the Bloomberg Global-Aggregate Total Return index (hedged to the U.S. dollar), which is used as a benchmark for developed market fixed income securities, had a year-to-date performance of 4.2%.
Returns are roughly double compared to developed market fixed income, “and yet, flows have been strongly into developed markets and flat out of emerging market fixed income,” Jackson said in an interview from London.
Flows into global bonds have risen 7.8% year-to-date as of October, while flows to emerging market bonds have fallen 5.2%, according to data from Broadridge Financial.
However, flows to the asset class have shown signs of stabilizing. In September, there were “real flows into EM fixed income … and now we start to see some modest flows into EM again,” he said.
“We are entering a period in which it's hard to find value in developed markets in fixed income, even in high yield, for example, and people have to start to look at emerging markets,” he said.
Investors are now showing interest in emerging markets partly because of value, and partly to diversify their portfolios, particularly as they start to realize their overexposure to the Magnificent Seven.
“It's a huge asset class, incredibly liquid, huge (and) much more diverse than it was 20 years ago. And actually, I think it will see flows next year. It might not see massive flows, but I think we're already starting to see the turn of the tide,” he said.