Tariff swings prompt repositioning in Asian assets
Investors hedge dollar weakness, split on Chinese equities
TOKYO -- The U.S. court battle over the legality of President Donald Trump's tariffs comes as global investors have been repositioning in Asian markets, expecting most regional currencies to strengthen as new American policies reshape global trade.
In the latest legal development, a U.S. federal appeals court ruled on Thursday that most of the levies can stay for now while it decides whether to uphold a lower court decision that Trump's "reciprocal" tariffs were illegal. The White House expects a final decision to be made by the Supreme Court.
Analysts said the recent legal developments only deepen uncertainty. "Our views were that tariff uncertainty would remain for longer. We thought the market was getting too complacent about tariffs, as seen by the market rebound since April 9," said Thomas Poullaouec, head of multiasset solutions for Asia-Pacific at T. Rowe Price in Singapore. "The legal back-and-forth on tariffs is just another episode of that uncertainty. We don’t think the sky is clear yet."
Trump’s global tariff war has been causing investors to de-risk and diversify away from U.S. assets. The tariff war has generally weakened the dollar, strengthening most Asian currencies.
“If you are an asset allocator, especially in Asia, and are investing in U.S. assets, you need to hedge the FX exposure,” Claire Huang, London-based senior emerging markets macro strategist at the Amundi Investment Institute, said during her visit to Tokyo on May 22.
“This is a big shift away from U.S. exceptionalism,” Huang said. “We’re seeing lots of relocation to Europe. Japan and emerging markets are next in line."
The strengthening of Asian currencies is a reversal from last year, when governments had to intervene in markets to shore up their weak currencies and central banks had to slow down their rate-cutting cycles. The recent dollar weakness has given Asian economies room to resume rate cuts. Lower rates mean more liquidity in markets and ultimately expectations of higher asset prices.
Major Asian currencies, other than the Indonesian rupiah, the Vietnamese dong, and the Hong Kong dollar, which is pegged to the greenback, have risen versus the U.S. currency in the year to Friday, according to QUICK. The Taiwanese dollar has gained 10% while the Japanese yen has risen 9%. Also rising versus the dollar are the South Korean won, up 7%, and the Singapore dollar, up 6%.
Despite concerns at the start of the trade war that China would push its currency down to offset the impact of U.S. tariffs, the onshore Chinese yuan was traded at 7.1853 on Friday, up 1.6% so far this year.
Huang said she does not expect China to devalue its currency, given its attempt at forging closer ties with the Global South. “To contain the risk from decoupling from the U.S., China cannot afford to use currency devaluation,” she said.
BofA Global Research updated its forecast for a stronger Taiwanese dollar and South Korean won, as well as a weaker Hong Kong dollar and onshore Chinese yuan, said strategists Chun Him Cheung and Adarsh Sinha in an email.
The strategists said they expect the onshore Chinese yuan to weaken to 7.50 through June before stabilizing at 7.30 in the second half of the year. While acknowledging that the U.S.-China trade war is fluid and the People’s Bank of China’s bias is toward a weaker currency, “The 90-day U.S.-China tariff reprieve and de-escalation back to 30% tariffs against China will incentivize less USD/CNY volatility," they said.
As for equities, investors pulled $5.1 billion from U.S. equity funds in the week to May 28, more than two times the outflows from the previous week, according to TD Securities data. Chinese equity funds recorded $1.1 billion in inflows, accounting for around half of the inflows into emerging market equity funds.
T. Rowe Price's Poullaouec said he recently cut Asian equity allocation to neutral from overweight as part of a de-risking trade. “The region has been initially targeted more aggressively by the U.S. reciprocal tariffs. While tariff risks decreased since, there is still no clear resolution in sight,” he said.
Poullaouec said he is underweight in equities and bonds and overweight in cash, and that he sees better opportunities outside of the U.S., particularly in Europe.
Even so, he remains overweight on Chinese equities, though he said the call is subject to change and “very short-term oriented." The Chinese stock market is driven by retail investors and sentiment, often moving separately from the broader economy, he said. “We are looking for some signals from the government that a stimulus may be coming to maintain the overweight.”
Within Asia’s emerging market equities, Amundi is overweight in Indian ones as they rebound from recent lows, Huang said. The French asset manager is underweight in East Asian equities as Trump takes aim at the semiconductor industry, affecting South Korea and Taiwan, she added.
Amundi has a defensive positioning in Chinese equities, preferring domestic-demand oriented sectors and high dividend stocks, Huang said. While the U.S.-China trade war is temporarily paused, the Chinese economy remains weak. “Just as the economy was beginning to stabilize, the tariff shock hit,” she said. “We no longer think the economy can avoid deflation.”
While acknowledging the advancements in Chinese technology, Amundi is skeptical about its long-term competitiveness, given the deflationary pressures, Huang said. “China needs to really boost domestic demand for its tech companies to win in the long term,” she said. “The essential thing here is profitability.”