A MONTH is a long time in equity markets. Since Apr 9 when US President Donald Trump announced a 90-day pause in his plan to impose “reciprocal” tariffs on the rest of the world, the S&P 500 has rallied hard. The 90-day detente between the US and China, announced on May 12, and soft US inflation data on May 13 solidified the US market gains, putting talks of a rotation from US assets on the back burner.
Given the US’ trade framework agreement with the UK and its 90-day detente with China still imply much higher tariffs levels, we think the euphoria may be premature. The negative impact of Trump’s trade policies will hit the US the hardest – and that is not yet reflected in economic data.
In previous cycles, equity market weakness has translated to US dollar strength in a “flight to safety”. But that appears to have changed in this cycle with the US dollar proving vulnerable to swings in market confidence. Moreover, the US fiscal position is likely to worsen, with Trump certain to plough revenues from tariffs into tax cuts, and that would be US dollar-negative.
Global investors remain very overweight on US equities, and we believe there will be a gradual move to increase allocations to other regions, and especially the Asia-Pacific.
Asia-Pacific starting to get inflows
Investors remain very underweight Asia-Pacific equities which is more a reflection of the past decade of US dominance than Asia’s economic fundamentals. However, in recent weeks, there has been a nascent change in trend with April 2025 inflows into Asia equity exchange-traded funds at US$33.3 billion, exceeding flows into the US (US$31 billion) and European (US$9.1 billion) equivalents. This indicates that the region is a destination for those seeking to diversify.
Japan is seen as a particularly attractive market for the “dedollarisation” trade, attracting US$57 billion into equities and bonds, the biggest monthly inflows since records began.
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Asia-Pacific equity valuations are close to trough levels compared to the US. On that basis, even given the US tariff headwinds, there is significant value to unlock. This makes the region a target-rich stock-picking environment.
Pressure on to reduce US tariffs
Asia-Pacific economies are very exposed to global trade flows. Major export economies such as Japan, South Korea and Taiwan potentially face very high tariff levels (24 per cent, 26 per cent and 32 per cent, respectively), unless they can agree on a framework for reductions by early July when the 90-day reciprocal tariff pause expires.
Emerging export-driven economies are in the same boat, with Vietnam (46 per cent), Indonesia (32 per cent), and Thailand (37 per cent) all seeking to negotiate.
Given the detente with China, the Trump administration’s desire to be seen to do deals, and geopolitical leverage via longstanding security ties, we expect the tariff levels to trend towards the baseline 10 per cent Trump originally set.
The net effect on transpacific trade will be negative. Economically, this means 2025 Asia-Pacific gross domestic product growth estimates of around 3.7 per cent at the start of the year could be difficult to achieve. But growth will still be much higher than projections for the US and Europe.
For the region, the most immediate countervailing policy response will be fiscal expansion in key economies including China, India and Indonesia. Moreover, inflation is already trending lower across the region, giving central banks room to ease policy more – especially if the US dollar weakens further.
Positive Asia fundamentals
For investors seeking long-term diversification from an overweight position in US equities, Asia-Pacific equities have a compelling investment thesis. An Asia-Pacific portfolio gives exposure to developed markets such as Australia and Singapore as well as emerging markets like Indonesia and India across all sectors – from commodities and industrials to technology, financials and consumer discretionary.
We believe exposure to the North Asian industrial economies of China, South Korea, Taiwan and Japan is essential, with world-class companies and an increased focus on shareholder value. We retain a positive stance on Japan equities, thanks to reasonable valuations, increased shareholder returns, governance reform and structural reform. South Korea’s “value up” initiative is at an earlier stage but should have a similar impact on corporate governance there.
Confidence in China’s international competitiveness and continued ability to innovate was boosted in January 2025 by the release of the DeepSeek Large Language Model (LLM), which was developed at lower cost than similar LLMs from the US.
China is already capitalising on advantages – such as rapid adoption of new technologies, a vast domestic market and an unrivalled manufacturing base – to lead in key industries including electric vehicles and renewable energy.
Dynamic emerging economies
In the emerging markets of South-east Asia where population is growing, technology adoption and mass consumption are underpinning domestic-driven growth to complement traditional strength in commodities and manufacturing. Recent weakness due to fears over the impact of US tariffs is providing good entry points for long-term opportunities that fit into our value-driven investment process.
In contrast, India equities have been richly valued compared to Asian peers so we are being very selective and remain underweight on the country. Nevertheless, India is building on its economic momentum by extending its manufacturing base. Trade deals with the UK, and perhaps later in the year with the US, help.
From the market peak in 2024, Indian equities have underperformed Asian peers. Combined with the recent tension with Pakistan, this has brought valuations to more reasonable levels, and investors can now gradually increase India exposure.
Valuation gap will close
Our conviction is that the enormous valuation gap between Asia-Pacific and the US will narrow in 2025 and beyond. It is crucial to focus on the fundamentals and take advantage of the volatility to identify medium-term alpha opportunities.
We believe an active approach with a prudent stock selection process is the best way to build and hold long-term exposure to Asia-Pacific equities.
The writer is head of Asia equities, Robeco