Our Thinking on the Markets

Right now we are in an incredibly complicated environment with regard to U.S. tariff policy gyrations and its whipsawing impact on global equity markets. One thing we can confidently assert is that however the trade negotiations play out, there will be higher tariffs and this will be negative for U.S. growth. As for interest rates, it’s unclear whether rates will be cut or remain as they are, at least in the near term.

The Trump administration is concerned about the U.S. trade imbalance with markets around the world and views bringing more global manufacturing and supply back into the U.S. as a way to combat it. Additionally, it’s concerned about China’s advancement in key sectors like artificial intelligence (AI), biotechnology and electric vehicles (EVs) and sees investment in domestic industries as a way of also addressing this issue.

The U.S. administration’s aim to ‘reshore’ manufacturing to address trade and competitive concerns carries inherent risk for U.S. growth and will have far reaching ramifications for other economies, both good and bad, in our view. It could take years to try to uproot global supply chains and it’s debatable whether the U.S. will achieve its goals at the end of the endeavor. The inflationary impact of this policy—not only because of tariffs but because of the need to find an available workforce in the U.S. to support new factories and plants—will be a long-term risk, we think. The burden of the current debt load in the U.S. could also increase as it becomes exposed to potentially rising interest rates given an enhanced inflationary environment.

“How successfully China navigates this period will come down to its domestic economic policy and internal structural reform.”

For now, as the situation plays out, we are likely to see periods of steep volatility in both U.S. and international markets. For emerging markets, like all other countries trading with the U.S., the next 90 days will be a period of uncertainty as reciprocal tariffs are paused while countries try and negotiate deals with the U.S. For China, which is facing new tariffs of as much as 145% on its exports to the U.S., it’s a different dynamic. The ability of the Chinese economy to weather such duties will be tested. However, with U.S. exports at around 3% of China’s GDP in 2024, how successfully China navigates this period will come down to its domestic economic policy and the structural reforms it is implementing. These reforms, in our view, are positive for China’s growth and its private sector expansion but they may need to be sped up in the current environment.

Positioning in Tariff Headwinds and Volatility

We think China’s leadership is prepared for a drawn-out standoff with the U.S. and as time passes it will stay focused on supporting its domestic economy. Whether tariffs on Chinese exports are below or above 100%, the impact is the same for U.S. consumers and China exporters, in our view—supply and demand will contract.

China and the U.S. may go down a path of standoff which China manages with domestic stimulus and looser monetary policy, or there may be deals which could involve China purchasing U.S. agriculture or energy, or giving its blessing to the sale of TikTok. Meanwhile, we think emerging markets generally will face degrees of reprieve in terms of tariffs in the coming weeks and months.

Overall, the second thing that we’re confident about is that 2025 will be a year of volatility; volatility with opportunity. Our positioning in Emerging Markets (EM) and China in the near term:

• EM Positioning
  
  • For emerging markets, tariffs have not gone away so exposure to more domestically- driven economies like India, China and parts of Southeast Asia is preferrable in our view. But we have to be selective. India is a challenging market and earnings have been weak, so we need to focus on quality and valuations.
  • We look at emerging markets through three buckets: The single country markets with strong economic domestic drivers such as India and China; the markets that are exposed to global interest rates and the U.S. dollar like Brazil and Mexico; and markets that are more subject to domestic politics like Southeast Asia.
  • Japan will be about alpha investment opportunities as it is heavily exposed to U.S. trade and will also face higher tariffs. In Brazil, rates are still rising but meaningful cuts are expected and when that happens it will be a big support for the market. We are selectively increasing exposure in Eastern Europe and Mexico, which has proved astute at handling the tensions with the U.S. We remain cautious on Taiwan and on South Korea’s more cyclical sectors because of their strong links to global trade—especially with the U.S.
• China Positioning
  
  • It’s results season and amid global market volatility there have been some good company earnings in China, in our view. We have started to add companies to the portfolio and increase existing exposures. We’re confident about our exposure across sectors which is mainly focused on the MSCI China Index and are in tuning-and-adjustment mode.
  • We have to be cognizant of China’s moves to stimulate the economy but we believe the focus should be on the organic potential of Chinese companies. For example, we think the DeepSeek break-through was a key development for China’s economy, and there’s also progress in other areas like biotech, which is competitive with the U.S.
  • We are attuned to a broader recovery in China’s economy and any potential resolutions in the U.S. trade standoff as we believe this could trigger a strong and sustainable rally. In recent years, the earnings of Chinese companies have been robust; it has been global sentiment that has held the market back. If broader growth begins to recover in China, we potentially see a big P/E (price-to-earnings) ratio moment, with upside pressure on valuations.