US-China trade relations have been tense for some time. With Donald Trump back in the White House, it seems fair to suggest they will remain fraught for the foreseeable future.
It was Trump who introduced heavy tariffs on Chinese goods during his first spell in power. His successor, Joe Biden, maintained them and even added several new restrictions.
Now Trump is further cranking up the pressure. On January 22, just two days into his second term, he rattled Chinese markets by declaring: “We’re talking about a 10% tariff on China.”
Of course, there are no guarantees that this rhetoric will be fully reflected in realpolitik. In the immediate wake of his re-election, via his Truth Social account, the then president-elect indicated much tougher measures were in prospect.
The new US Treasury Secretary is also on record as describing Trump’s approach as one of “escalate to de-escalate”. Speaking last year, Scott Bessent, a billionaire financier, said of the Commander in Chief: “My general view is that at the end of the day he’s a free trader.”
Nonetheless, investors in Asian equities might reasonably question whether the world’s second-largest economy is the place to be right now. Is Trump rendering China completely “uninvestable”?
Hardly. China has been conspicuously stepping up wide-ranging efforts to reinvigorate its economy and reignite wider investor interest, and its determination in this respect is highly unlikely to wane.
Yet what Trump perhaps is doing – albeit unwittingly – is strengthening the case for looking further afield in Asia. Maybe above all, he has underlined the appeal of the region’s smaller companies.
This is because trade tariffs, obviously, are imposed only on exporters. As a result, a business whose focus is mainly or entirely domestic is more likely to be “Trump-proof” – and such companies tend to reside towards the lower end of the market-capitalisation scale.
Asian small-caps have materially outperformed their large-cap counterparts in recent years . Those in India have fared especially well . Yet many investors persistently overlook these stocks.
This is principally because Asian smaller companies are under-researched. Most investment analysts pay them little or no attention, preferring instead to concentrate on US technology businesses and other titans that loom in plain sight.
The task of identifying the brightest opportunities therefore tends to fall to specialist investment teams. Ideally, these use direct engagement to develop in-depth knowledge of businesses.
This is how our fund operates. We believe a comprehensive understanding of places, people, policies, practices and prospects is vital to arriving at informed investment decisions.
One of our best-performing stocks in 2024 was Prestige Estates. Established in the mid-1980s, it has overseen hundreds of major real estate projects as India’s cities increasingly embrace modern urban living.
Another holding, Medikaloka Hermina, runs almost 50 hospitals in Indonesia – one of the world’s most populous nations. The business is well positioned to take advantage of the rollout of universal health coverage under the country’s ambitious Jaminan Kesehatan Nasional scheme.
We regard companies such as these as compelling examples of long-term, domestically focused growth. The fact that they are unlikely to be adversely affected by a global trade war merely adds to their allure.
None of this is to say, however, that we no longer see any appeal in Chinese companies and Asian exporters. We continue to invest in both, with two considerations in particular in mind.
The first is that there is always merit in diversification. Not least against a bigger-picture backdrop on ongoing uncertainty, it makes sense to invest across an array of dimensions – including geography, size, sector and market focus.
The second, as touched on earlier, is that politicians do not exactly boast a perfect record of fulfilling their pledges. What they say does not necessarily translate into what they do.
After all, it is only a few months since Trump – somewhat confusingly, it must be said – warned China to expect “an additional 10% tariff, above any additional tariffs” . Whatever it meant, this threat appears to have been quietly forgotten.
Realistically, politics is likely to play some sort of role in many investment choices. Ultimately, though, it might not be the most reliable factor in shaping diligent stock-picking and portfolio management.
In our opinion, irrespective of who occupies the Oval Office, it is an individual company’s unique attributes that really count. This is why we regard a genuine on-the-ground presence as vital to unearthing Asia’s hidden gems.
Important information:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Emerging markets tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.
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