On the 20th (local time), the second term of Donald Trump's administration is expected to mark the beginning of the 'Strongman' era. Since President-elect Trump has consistently spoken of America first, there is a high possibility that funding will also tilt toward the U.S. However, opportunities may also lie in the opposite direction of what everyone thinks. The securities market has advised that it is time to pay attention to India and China.
On the 16th, Woo Ji-yeon, a researcher at DS Investment & Securities, noted, "This year's core theme for emerging market stock exchanges is the Trump risk. If the theme is clear, the strategy is already set," and added, "One should pursue strategies that can benefit from the Trump risk." Similar to how the U.S. contained a growing China during Trump's first term (2017-2021), this implies that such risks can be leveraged as benefits.
Last year, the returns on emerging market stock exchanges were not bad. While the Morgan Stanley Capital International (MSCI) developed markets (DM) rose by 17%, the MSCI Emerging Asia Index increased by 10%. By specific regions, Taiwan recorded a return of 33%, China 17%, Malaysia 16%, and India 11%. Researcher Woo stated, "It is necessary to adopt a selective strategy centered around regions with high potential for growth."
It is observed that the investment environment in emerging markets will improve this year compared to last year. This is due to reduced concerns about capital outflows resulting from interest rate differentials with developed countries. Although there are counterarguments, it is expected that by year-end, the Federal Reserve (Fed) will lower interest rates, which will lessen the interest differentials with EM Asian countries.
Regions that could benefit from Trump, specifically those with low sensitivity to Trump risk, have been identified by Researcher Woo as China and India. The Trump administration's second term is likely to weaponize tariffs, but the two countries have low dependence on exports to the U.S. Last year, the export scale to the U.S. relative to the gross domestic product (GDP) was 2.4% for China and only 2.3% for India. Mexico held the highest at 26.6%, while South Korea reached 6.3%, three times that of China and India.
Researcher Woo mentioned, "China and India have robust domestic-centered economic structures among the major trading partners of the U.S.," adding that "they are likely to face relatively limited tariff risks." Interestingly, the two countries should also be highlighted from the perspective of the accelerated restructuring of the global supply chain due to the aftermath of the second tariff war.
In the past, Mexico and Vietnam benefited from the restructuring of supply chain flows during the first tariff war, and this time, it is India's and China's turn. China's onshoring policy is gaining momentum, and India's fundamentals and stable foreign relations are expected to enhance its preference as a global production hub.
The Chinese government's commitment to economic stimulus is also a positive factor. This year, China has declared expanding domestic demand as its top policy priority and unveiled an unprecedentedly strong stimulus plan. According to current media reports, China is planning to increase the budget for the 'old-for-new subsidy' program, which grants subsidies for replacing old appliances or IT devices, and to expand the support range. If the Chinese stock market continues to rise in the first half, India is also expected to show price-related merits.
Amid growing concerns about the outbreak of a second trade war due to the start of Trump's second term, the outlook for EM profits remains optimistic. According to Bloomberg, the 12-month forward earnings per share (EPS) forecast for the MSCI EM is 5.9%. Considering that it was minus (-) 8.2% during the previous U.S.-China trade war, many risk factors have not yet been reflected. In this regard, Researcher Woo advised, "One should be cautious about the possibility of further downward adjustments in performance forecasts for EM corporations."