Bellwether indices opened in the red across Asia on April 7, the result of the US levying tariffs on some 60 countries and trading blocs. This was further exacerbated by US President Donald Trump’s comments over the weekend, indicating that the reciprocal tariffs are here to stay.
One reason for the outsized move in Asian markets is that their economies have a larger trade orientation, hence the term “Asia export-model”, says David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco
“The simplistic methodology the White House has taken to calculate retaliatory tariffs (taking the bilateral trade deficit and dividing it by the countries total US exports) means that Asian countries were hit with higher tariffs,” says Chao in an April 7 note.
But Asian currencies have outperformed relative to the US dollar. The Japanese yen, especially, is exhibiting its defensive and safe haven characteristics, adds Chao. “It’s possible the weaker dollar is reflecting that when you add the cumulative damage done by tariffs across all trading partners, the US economy will be more impacted than most others.”.
The markets are now in a “wait-and-see period” as further escalation from the US side is possible, says Chao. “Still, we do not believe that China nor the US wants to see a ‘tariff cascade’ scenario.”
Chao thinks investors should stay invested in Asia. “The region looks a lot more attractive both on a valuation point of view but also from a relative growth perspective.”
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Asian policymakers are likely to ramp up both fiscal and monetary stimulus to provide a shield to their local economies and ensure that growth fundamentals are on track, he adds.
Today's market movements suggest that Trump’s tariffs could backfire, says Chao. “Investors are more concerned about the health of the US economy and whether tariffs will trigger a domestic recession.”
Chao anticipates “significant volatility and downward pressure” on risk assets in the near term. “We also must recognise that earnings uncertainty increases for each day that these high tariffs are in force. Notably, ‘normal’ correlation between stocks and bonds has returned.”
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Invesco has outlined three scenarios with Trump’s tariffs: an escalation, a status quo and de-escalation.
In the worst-case scenario of an intensified trade war, the global economy enters a recession and creates stagflation in the US.
Investors may look for cover elsewhere, he adds, such as in non-US low volatility stocks, such as in utilities and telecommunications.
Investors could also consider sovereign debt, gold and safe-haven currencies like the Japanese yen or Swiss francs.
Conversely, should leaders choose to de-escalate by removing tariffs, investors should enter small-cap US stocks and pick names in industrial commodities and energy.
The US dollar should outperform under this best-case scenario, along with “commodity currencies” like the Australian dollar and the Canadian dollar, according to Invesco.
Table: Invesco
