A second Trump administration could transform Asia

In the US, the popular vote, Electoral College vote, and Republican Congress all signal President-elect Donald Trump’s overwhelming mandate for change. This mandate will reverberate globally, with significant echoes likely felt in Asia.

Asia now finds itself in focus for the incoming Trump administration. A victory for Kamala Harris would likely have represented continuity of policy from President Joe Biden. A Republican victory signifies major changes in political, economic, financial, and regulatory channels.

Profound and rapid change lies ahead for Asia. In cross-border trade, currency, risk appetite, and geopolitics, the influence of the new administration in Washington will be far-reaching in our view. The effects may be challenging and will likely materialise sooner rather than later, perhaps as soon as the first half of 2025.

China trade

The US-China relationship is fundamental to America’s broader engagement with Asia, with trade playing a pivotal and bipartisan role. From the US perspective, this relationship is two sided. On one hand, China is one of America’s most important trading partners; on the other, it raises concerns about trade imbalances, currency manipulation, and market distortion.

The ambition for a US manufacturing renaissance is driving the Trump administration’s promises to “bring back jobs” and “make America great again.” This was a key aspect of campaigning, supported by proposed tariffs and quotas. With potential tariffs of 60% on Chinese goods and 10% on the rest of the region, the stakes are high.

The ripple effects of US fiscal and monetary policy… may be more pervasive than tariffs

However, we have seen this scenario before. In 2018, President Trump targeted approximately USD 360 billion in Chinese imports to address concerns over intellectual property and reduce the trade deficit. While the direct impact of the tariffs was limited, the indirect effects significantly dampened global corporate confidence and investment.

From a regional perspective, the ripple effects of US fiscal and monetary policy under the new administration may be more pervasive than tariffs. A focus on border control, tax cuts, and tariffs may raise inflationary pressures in the US economy, leading to higher interest rates and bond yields. Indeed, following the election, we raised our forecast for the Federal Reserve’s terminal rate to 4%.

As higher US rates migrate to Asia, local economies – already impacted by reduced export growth – will face a weaker growth outlook. The US dollar will play a crucial role in this transmission. A strong dollar increases the cost of dollar-denominated imports, leading to higher inflation and straining consumers and businesses in import-reliant countries. Furthermore, nations with significant dollar-denominated debt will encounter higher repayment costs, impacting national budgets and growth investments.

Why Asia?

Against such a challenging macroeconomic backdrop, we think the question around market opportunity will shift from ‘buy Asia’ to ‘why Asia?’ While there may be attractive opportunities among Asian equities, US markets continue to draw investment flows, reflecting a dynamic economy and robust corporate earnings, including for mega-cap tech firms.

The consensus outlook on US earnings growth is on par with those for Asian equity markets

Our recent decision to raise portfolio exposure to US equities reflects this US economic exceptionalism, which we anticipate will persist as the macro effects of Mr Trump’s policies take hold. We note that the consensus outlook on US earnings growth is on par with that for Asian equity markets (see chart 1).

Investors face a choice between risk and opportunity in Asia versus the US, and historically, they have favoured the latter. Although the strong dollar will likely boost the earnings of Asian businesses sensitive to US demand, it could also raise the debt servicing burden for quasi-sovereign issuers and banks that are crucial for the region.

Additionally, firms with dollar-denominated debt will likely face higher repayment costs, straining their financing and investment activities. In President Trump’s first term, USD denominated credit spreads widened steadily as he imposed tariffs, although they appeared stable in the immediate aftermath of his election in 2016 (see chart 2).

We believe Asian economies will maintain reasonable growth in 2025 as the economic impact of tariffs is relatively moderate in comparison to recent stress episodes including the banking crisis or global pandemic. China’s pivot toward stimulus provides hopes that the country can withstand the shock of new US tariffs, and that could anchor the region’s financial market performance. It is, however, difficult to imagine rising global demand for Asian risk assets before the President-elect’s likely transactional approach to tariffs yields more encouraging developments than his campaign pledges suggested.

Taking sides

The Trump administration's most profound impact on Asia may be its deglobalising effect on international relations. The US has increasingly focused on domestic interests. This trend is unlikely to change and could leave room for a more assertive China to fill the void.

The mutual desire of the US and China to decouple… has evolved from a trade dispute into a more permanent shift

The mutual desire of the US and China to decouple from their long-standing economic relationship has evolved from a trade dispute into a more permanent shift. Asia largely orbits around China's economy and America's political influence, creating tensions that have historically been managed through pragmatism and flexibility. However, this balance is fraying.

As Asia's geo-economic dynamics shift, local investment strategies must adapt to rising tensions and flashpoints. Economic uncertainty stemming from potential trade deal failures and sanctions compounds the situation.

While many Asian nations have maintained a non-aligned stance between the US and China, the economic allure of China – especially through ambitious multi-regional infrastructure developments like the ‘Belt and Road’ initiative – makes neutrality increasingly challenging. This may lead to a realignment of positions, resulting in new spheres of influence.