Donald Trump’s victory in the U.S. election is set to influence short-term money flows into Asia’s largest equity markets, with rising tariff risks threatening Chinese assets. Investors are increasingly eyeing India and Japan as alternative markets, as Trump’s anti-China stance raises concerns over trade restrictions. The president-elect has previously suggested imposing tariffs as high as 60% on Chinese imports, fueling concerns about the outlook for China’s economy. As a result, Morgan Stanley has reaffirmed its preference for Indian and Japanese stocks over Chinese equities.
India, with its focus on a domestic-driven economy and potential as a manufacturing alternative to China, stands out as an attractive destination for investment. The country’s relative immunity to global risks, coupled with its large and cost-competitive workforce, positions it as a key beneficiary of the ongoing shifts in global supply chains. Japan, on the other hand, is viewed as an indirect beneficiary of Trump’s economic policies, which are expected to keep interest rates elevated, thus strengthening the dollar while weakening the yen—beneficial for Japan’s exporters.
Mark Mobius, a seasoned emerging-market investor, notes that supply chains moving away from China are creating opportunities not only for India and Japan but also for other Southeast Asian nations. “India stands to gain the most, as its workforce can match China’s both in size and labor costs. If Trump maintains or even extends trade restrictions on China, it will benefit India significantly,” Mobius stated.
This trend was evident in Wednesday’s market movements. As Trump’s return to the White House became more likely, the MSCI Japan Index and MSCI India Index surged by at least 1.5%, marking their best performance of the quarter. Meanwhile, the MSCI China Index dropped by more than 2%, reflecting concerns over the potential for heightened tariffs and trade restrictions.
The ongoing tariff threat complicates China’s efforts to revive its economy, which has been under pressure despite a series of stimulus measures announced since late September. These efforts are crucial for Beijing, with investors keenly watching the outcomes of the National People’s Congress standing committee meeting. Analysts at Morningstar, Lorraine Tan and Kai Wang, noted that if the Chinese government’s stimulus measures fall short, investors may shift their focus from China to Japan, as was observed after China’s initial stimulus announcements.
Chinese stocks had already been facing pressure ahead of the U.S. election, with a rally fueled by a monetary policy blitz losing momentum amid concerns over fiscal spending plans. The CSI 300 Index had surged nearly 35% from September to early October, but has since declined by approximately 5%.
Republican proposals to impose higher tariffs on Chinese goods could further weigh on the Chinese economy, according to Morgan Stanley strategists, including Jonathan Garner. They caution that the potential effects of tariffs could outweigh the benefits of any reflation measures introduced at China’s legislature meetings this week. Morgan Stanley continues to favor Japan, India, and Australia, while maintaining an underweight position on China.
Any continued weakness in Chinese stocks may present a boost to India, especially as China’s rebound has been one of the key reasons for a record outflow of foreign capital from Indian equities in October.
However, not all investors are pessimistic about China’s prospects. Societe Generale maintains an overweight position on Chinese assets, anticipating that the policy adjustments made since late September will continue to support equity markets.
Both India and Japan face their own challenges, though. Japan is grappling with potential currency volatility and the possibility of intervention as the yen weakens against the dollar. Meanwhile, India is experiencing a slowdown in economic and earnings growth after the strong post-pandemic recovery.
Emkay Global Financial Services economist Madhavi Arora observed that the “Trump trade” could bring short-term benefits to India in terms of foreign flows. However, she cautions that sustaining this rally in the long term may prove challenging.
In conclusion, Trump’s election victory has already begun reshaping investor sentiment, with funds flowing away from China and toward India and Japan. While these markets present opportunities, they too face their own set of risks that could temper the optimism surrounding them in the coming months.
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