The ongoing trade war between the United States and large parts of Asia could spell trouble for emerging market investors. But Allsprings’ Alison Shimada argues much of the pessimistic rhetoric has already been priced in.
The re-election of Donald Trump as President of the United States has been met with trepidation by many institutional investors as parts of his agenda could prove to be inflationary, including his threats of high tariffs and plans for the large-scale deportation of immigrants.
But his plans could prove to be especially tricky for emerging market (EM) investors, since this time it is not only China that is firmly in Trump’s crosshairs, but also many of its neighbouring countries.
Yet, as is often the case with markets, much of this narrative is already priced in and many EM companies have already adjusted their operations, Alison Shimada, Head of Total Emerging Markets Strategy at Allspring Global Investments, says.
The companies that operate out of China have had some time to adjust... They've had time to think of contingencies and adjust their business models and operations accordingly. So am I concerned about it? I think we know pretty well now what to avoid
“There are already a lot of tariffs that have been put on countries like China. So I see at least a continuation of many of those policies carried over from Biden, which were, in turn, carried over from the previous Trump administration,” Shimada says.
“You see a world in which free trade has taken a backstep and there are many more barriers to trade than there have been.
“[But] there are a lot of companies that are sanctioned already and it’s not like we’re suddenly talking about tariffs. Both trends have been in place for quite some time.
“The companies that operate out of China have had some time to adjust. They have adjusted their supply chains. They’ve adjusted their capex plans. They’ve changed their end markets. They’ve had time to think of contingencies and adjust their business models and operations accordingly.
“So am I concerned about it? I think we know pretty well now what to avoid.”
China is Shimada’s largest geographic holding and she has a slight overweight to the country compared to the MSCI Emerging Markets Index. She argues investor sentiment is so poor when it comes to Chinese equities that valuations have become increasingly attractive and they might surprise on the upside.
“China is a domestic consumption recovery story; it is coming off a really, really tough housing situation, such that it probably takes three to five years to work through. The government has worked to support real estate demand through a variety of measures to date, such as lowering mortgage rates, loosening residency restrictions for major cities and lowering down payments, but additional time is needed to work through high levels of housing inventory and to complete projects,” she says.
“The other area is consumer sentiment. So this year will be a year when the government will focus on fiscal stimulus that benefits consumers directly. Until now, it’s been kind of indirect, but they realise it’s been a year or two and consumer sentiment is not picking up as they would like. So we expect more direct intervention to create incentives for consumers to spend.
“But I think that the local and foreign investment sentiment around China is so low that it’s not going to take much to move the market higher. It is at a very low valuation, especially when you compare it to India, which is trading at a much higher valuation. India is a little bit expensive with perhaps more downside risk.”
Already there seems to be some softening of rhetoric from Trump now that he has taken office. Whereas previously he has threatened tariffs of up to 60 per cent on Chinese goods, more recently he seemed to have softened his stance and is now looking at 10 per cent tariffs on Chinese imports initially.
Investors could potentially see some price recovery if the overall tariffs do turn out to be lower than feared.
“One of the biggest possibilities globally this year could be China. If Trump does not or cannot enact the types of tariffs he has discussed of around 60 per cent, anything less than that and the market will move,” Shimada says.
TSMC and DeepSeek
Taiwanese chipmaker TSMC is Shimada’s largest holding in the portfolio. But when this interview took place, Chinese artificial intelligence company DeepSeek had just released its R1 Model, which rocked the establishment due to its claims over the low cost of its training and use of inferior chips compared to its US counterparts, such as OpenAI and Meta.
But ultimately, Shimada believes her investment in TSMC is a solid one.
“I think this news about DeepSeek puts a question mark behind how much computing power you need and how many chips you need and the demand profile for that,” she says.
“So, there will be volatility around that, but TSMC is just such a fabulous company and they got there for the right reason. I’m happy to be overweight a company like that because they have a proven management team and continue to execute on their strategy. They are also very conscious of minority shareholders and have consistently delivered shareholder value. They’ve always produced outstanding products that no one can live without now.
“The only thing is whether DeepSeek will affect overall global demand. That is a question there and I’m sure that stocks will react a little bit around that over the short term.”
But DeepSeek is another example of why investors shouldn’t discount Chinese companies.
China has been cut off from [high-performing chips], but they still managed to do something technologically advanced that shook markets. So that puts into question why large companies like Meta are in a chips arms race? Do you really need to spend US$60-65 billion on AI development?
“China has been cut off from [high-performing chips], but they still managed to do something technologically advanced that shook markets. So that puts into question why large companies like Meta are in a chips arms race? Do you really need to spend US$60-65 billion on AI development? People wonder about that now,” Shimada says.
“What it may do for China and for the world is to possibly trigger earlier commoditisation for computing power-related AI hardware as tech giants may revisit costs/performance of computing power more carefully.
“It will allow smaller companies to develop more software applications if the development cost declines. It also may trigger earlier monetisation of AI applications, which will be good for software companies, new AI business models or new AI applications, like humanoid AI robot. In other words, the potential for AI widens and accelerates as costs decrease.
“In all the discussions about EM, people like to say: ‘China is uninvestable.’ However, as we have seen with the DeepSeek announcement, there is a strong drive to lead with innovation and to keep up with cutting-edge global technology. Despite everything, they’ve been able to excel at certain areas such as EVs (electric vehicles), autonomous driving, humanoid robots and software development.”
Opportunities in Malaysian Equities
China might be the largest holding in her portfolio, but there are plenty of other interesting countries around. There is a lot of development taking place in the Middle East and many of its markets are pegged to the US dollar, which makes it an attractive place to invest.
Poland could prove to be another interesting destination when the war in Ukraine ends and the rebuilding process starts. With its sophisticated economy and proximity to the region, Poland could play a key role in Ukraine’s resurrection.
In Asia, Malaysia has some attractive characteristics and the establishment of the Johor-Singapore Special Economic Zone earlier this year could prove to be a catalyst for heightened economic growth.
Early in her career, Shimada lived in Malaysia and worked as a Malaysian equity analyst at Commerce Asset Fund Managers, becoming a portfolio manager for a Malaysian equity income strategy.
The timing was unfortunate as the strategy was launched just before the Asian crisis of 1997, but Shimada says it did demonstrate Malaysian equities hold up well by using a shareholder return framework.
“These types of [strategies] work well in range bound, declining or moderate growth markets. They just don’t do well in a massive, low-quality, high-beta rally because they’re not designed for that. But in three out of the four scenarios, focusing on dividends, buyback, as well as capital appreciation, can do very well,” she says.
At the time, Malaysia provided good dividend yield and provided reasonable liquidity to investors. But since then, market activity in Malaysian equities has fallen and liquidity has dropped off significantly.
Yet, Shimada still holds a select number of Malaysian stocks and has a minor overweight versus the benchmark at 1.6 per cent of the total portfolio. Although liquidity in Malaysian stocks is an issue, she finds the case for the Malaysian economy to be attractive.
It has stable business conditions, the country has many natural resources, including tin, bauxite, iron ore, copper and gold, while the current Prime Minister is making inroads to improve equality for minorities in the country.
“One of the problems with Malaysia historically has been a separation between the opportunities that there are for Malay versus other ethnic groups under the Bumiputra policy. But the Prime Minister Anwar [Ibrahim] government is more inclusive, even though the Prime Minister is Malay,” Shimada adds.
The creation of the Johor-Singapore Special Economic Zone is only increasing the opportunity set in the country. At the end of January, Lawrence Wong, Prime Minister of Singapore, signed off on an agreement to create the zone as Malaysia and Singapore seek closer ties in an increasingly unfriendly world.
The two countries have had a strained relationship in the past, not in the least because Malaysia expelled Singapore from its Federation of Malaya in 1965 on the back of racial tensions and political differences between Singapore’s People’s Action Party and Malaysia’s Alliance Party.
But increased geopolitical tensions across the world, including, again, the US trade war with China, and a faltering Chinese economy has brought the two countries closer together. Shimada believes the new zone could be a win-win for both countries.
[The Johor-Singapore Special Economic Zone] does remind me of the sort of Greater Bay alignment between Macau, Hong Kong and Shenzhen. And that's the largest urban population in the world now
“It makes a lot of sense because Singapore does need more land. There are strong transport links between the countries and people regularly commute between the two,” she says.
“Malaysia does stand to benefit from cutting-edge technology [in Singapore]. They could benefit from better usage of the Johor region in terms of having mixed developments, more manufacturing, more government revenue.
“It does remind me of the sort of Greater Bay alignment between Macau, Hong Kong and Shenzhen. And that’s the largest urban population in the world now.”
Shimada expects the companies that will benefit most from the new zone will initially be industrial companies as a lot of infrastructure will need to be built.
“I think energy infrastructure could do well, including companies like Tenaga (Nasional), as well as construction and engineering companies. We also like Westports, which is a port operator in southern Malaysia, in the Johor region, that benefits from supply-chain realignment and changing trade flows from the China +1 strategy,” she says.
This article is sponsored by Allspring Global Investments. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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