Trump’s China threat has investors favoring India, Japan stocks

Donald Trump’s election victory is seen changing the course of near-term money flows for three of Asia’s largest equity markets as tariff risks loom large over Chinese assets.

Market watchers see the possibility of funds flowing into India and Japan while investors assess Trump’s anti-China stance, with the president-elect earlier having threatened to put tariffs of as much as 60% on Chinese goods. Morgan Stanley just reiterated its preference for the two nations’ shares over China’s.

India, viewed as a manufacturing alternative to China, is appealing to investors for its relative immunity to global risks given a domestic-driven economy. Japanese stocks are seen as indirect beneficiaries of Trump’s reflationary economic policy — which is expected to keep interest rates high, thereby boosting the dollar and weakening the yen to the advantage of the Asian nation’s exporters.

“Supply chains have been moving away from China and that helps not only Japan and India but also other countries, particularly in Southeast Asia,” said veteran emerging-market investor Mark Mobius. “India is the big beneficiary since only India’s workforce can match the Chinese in numbers and labor costs. With Trump maintaining or even extending trade restrictions on China, this will be positive for India.”

That suggests Wednesday’s price action in Asia is likely to have been a sign of things to come. As it became clear that Trump will return to the White House, the MSCI Japan Index and the MSCI India Index rallied at least 1.5% each to cap their best day so far this quarter, while the MSCI China Index slumped over 2%.

The threat of tariffs is seen complicating Beijing’s efforts to revive the economy and lift market sentiment through a series of stimulus measures that began late September. This makes the nation’s ongoing legislature meeting all the more crucial for investors.

“Should China’s anticipated stimulus announcements be less meaningful than expected, we believe investors could also rotate China exposure into Japanese equities which was seen prior to China’s initial round of stimulus announcements,” Morningstar Inc.’s analysts Lorraine Tan and Kai Wang wrote in a note.

Chinese stocks were already under pressure in the run-up to the US election, with the rally triggered by a monetary policy blitz cooling in the absence of an impressive plan for fiscal spending. The CSI 300 Index surged nearly 35% from a September low through October 8, but has fallen about 5% since.

‘Short-term hit’
Republican proposals to impose higher tariffs on Chinese goods are likely to weigh on growth in the world’s second-largest economy, Morgan Stanley strategists including Jonathan Garner wrote in a note.

“Bear in mind the tariff headwind could discount the net-net effect of the potential reflation measures” to be announced at China’s National People’s Congress standing committee meeting this week, they said. “We reiterate our core overweight Japan and underweight China view as well as our preference for Australia and India which we also overweight.”

Any further weakness in Chinese stocks is likely to be positive for their biggest emerging-market rival India, given that China’s rebound has been cited as one of the key reasons for a record foreign exodus from the South Asian nation’s shares in October.

Some other investors are more optimistic about China’s prospects.

While Societe Generale SA sees a short-term hit to Chinese assets, it’s maintaining an overweight position on expectations that the “policy course correction undertaken since end-September” will continue as the main equity driver.

And Japan as well as India have problems of their own to deal with. The former is staring at the possibility of excessive currency moves and potential intervention as the yen weakens against the dollar, while the latter is witnessing a slowdown in economic and earnings growth after a strong post-pandemic boom.

“In the very-near term, the Trump trade could also be tactically positive for India” in terms of foreign flows, Madhavi Arora, an economist of Emkay Global Financial Services Ltd., wrote in a note. “However, there will be challenges in sustaining that rally.”


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