Key takeaways

• China’s prospects this year depend largely on the size of future stimulus packages. Should they prove expansive, investors may find greater rewards in the country’s onshore market.
• Tariffs could reconfigure investment trends across the region as a whole. Domestic-led economies stand to benefit most. Japan, lately enjoying wage inflation, may soon join that group.
• Expect countries like Japan and South Korea to fill a China-shaped hole in global manufacturing.

It bears repeating: there’s more to Asia markets than China. That’s particularly true when the US imposes tariffs of up to 145 per cent on the latter and it’s where we focus in the latest episode of The Investor’s Guide to Asia: identifying the region’s winners as President Donald Trump’s new trade policies take hold. 

• Listen to the Investor’s Guide to Asia podcast here.

China: Still awaiting stimulus

The conversation begins, of course, with China. Head of Asian investment directing, Stuart Rumble, reports a mixed picture: one that involves trucks sitting in wait outside the US border, factories winding down, and orders being cancelled as tariffs leave their mark. At the same time, there’s plenty of evidence to suggest some companies have adapted their supply lines or have sufficient pricing power to pass on additional costs to consumers. 

Peiqian Liu, Fidelity International’s Asia economist, takes us through the macro picture. She says the current confusion revolves around the sort of stimulus measures Chinese policy makers are willing to implement. For now, they are focused on stabilising sentiment, which has prompted a cautiously optimistic market response. “It’s safe to say that China’s growth was on track for recovery. A lot depends on the stimulus.” 

George Efstathopoulos, a multi-asset portfolio manager, provides the bottom-up view. He explains that the mood around Chinese equities is buoyed less by hope (as has been the case in recent years), and more by fundamentals. Earnings in China’s offshore market, for example, finally look competitive versus the rest of the world after 13 consecutive quarters of disappointing reports. Despite all that’s happening now, he notes that “the Chinese market is one of the best performing equity markets this year.”

But it’s in China’s onshore market that Efstathopoulos is most excited. That’s because earnings here are more closely tied to Chinese domestic consumption, and less to exports. As such, they’re less likely to feel the pain of trade tensions and more likely to benefit from future stimulus. Earnings are yet to rebound in this market, meaning there’s plenty of room for upside.

The mood, then, is likely to be determined by where policy makers go next. “We haven’t seen meaningful stimulus yet,” says Efstathopoulos. “If we were to see it, that would present an interesting opportunity.”

Look for the domestic-focused markets

The enthusiasm for the Chinese onshore market highlights a common theme: those companies with decent domestic revenues stand to benefit most from a trend towards repatriation. 

That’s one reason why Japan looks particularly attractive in this new world. 

Japan endured one of the deepest sell-offs on ‘Liberation Day’. That makes sense - it’s a cyclically exposed, exporting economy. But Japan is also experiencing wage inflation for the first time in decades, which is “reshaping consumption”, according to Efstathopoulos. He thinks this could be the start of a longer-term shift in consumer habits in a country renowned for its exporting prowess.

For investors, that means shifting focus towards Japanese mid-caps, where domestic revenue generation is highest, and where large-cap corporate reforms are now starting to trickle down. Homegrown growth will also benefit Japanese banks, for which the revenue base is mostly homegrown, adding to earnings from some of the world’s steepest yield curves. 

Don’t give up on the country’s exporters, however. The absence of China from a global marketplace leaves a lot of slack for countries like Japan and South Korea to pick up. If trade tensions intensify, don’t be surprised to see these countries’ manufacturing share increase.

These trends will benefit other countries too, but in different ways. For domestic-oriented growth in places like India and Indonesia, for example, look to large-caps. “Both of these markets have very large domestic economies,” says Efstathopoulos. “That makes them less sensitive to what happens on the trade front.”

Sectoral, and regional, winners

Liu identifies three important macro themes for the region as a whole.

The first is the importance of sectoral tariffs, as well as regional ones. These will have an asymmetric impact across the region. Tariffs on autos, for example, will adversely affect producers like Thailand, South Korea, and Japan. The obvious losers from high semi-conductor tariffs are Taiwan and Malaysia, while Singapore will feel the impact if pharmaceuticals are targeted. 

Next, the tariff differentials on China versus the rest of the region. This is particularly relevant in the context of ‘China + 1’, the strategy employed by manufacturers to diversify supply chains beyond the mainland. We could see a reconfiguration of production networks across the region more broadly: “corporates are adapting to the new tariff regime, whether they choose to continue pushing forward China + 1, or whether they reshore,” Liu explains.

Finally, there’s the impact of tariffs on demand. This trade war is likely to dampen global growth, and possibly push the US into recession. That will have knock-on effects on demand, and so could punish export-oriented economies further. 

The devil lies in the detail. As multi-asset portfolio manager Taosha Wang explains, “the interplay between exogenous (tariffs) and endogenous factors gives us a very different set of investment opportunities.”

That’s no surprise in a region as rich and diverse as Asia. News is dominated by China - because of its size and the US hostility. But beyond the headlines there is room for the discerning investor to identify the region’s outliers, and benefit from any reconfiguration of markets.