With China’s economic recovery gathering strength, we expect emerging market stocks and bonds to fare better than their tariff-hit developed market peers over the coming months.
Asset allocation: Trump policies give emerging markets the upper hand
Financial markets risk losing their bearings. Primarily because the world’s two largest economies appear to be heading in opposite directions.
In the US, economic prospects are uncertain. Donald Trump’s policy announcements in the first 10 weeks of his administration – which include 25% tariffs on US auto imports and an aggressive crackdown on immigration – have proved more far-reaching than many economists and investors had anticipated. The measures will likely be stagflationary – for the US, mainly, but some other advanced economies too. All of which isn’t particularly encouraging for the stock and bond and markets of the developed world.
By contrast, China may be finally coming out of the doldrums. While US tariffs have negative effects on Chinese growth, Beijing’s
coordinated monetary and fiscal stimulus – estimated to be nearly RMB5 trillion, or more than 3 per cent of GDP — seems to be bearing fruit. This is most evident in the housing market, which is crucial for the country’s recovery, but also in consumption figures, which rebounded by more than 15 per cent on an annualised basis in the final three months of 2024.
A recovery in China has helped lift other emerging economies, which are also benefitting from falling inflation, easing monetary policies, and a weaker US dollar.
Taking all this into account, we see more opportunities in the emerging world than in developed countries. Although we are neutral across stocks, bonds and cash, we have overweight positions in emerging market debt and equities, including Chinese stocks.
Our overweight stance on gold remains unchanged, which we see as a hedge against volatile and unpredictable market moves.
