With the U.S. election results settled, investors are now evaluating the economic policy implications. U.S. risk assets are buoyed by the ongoing soft landing and prospects of deregulation and lower corporate taxes. However, the outlook for international markets, particularly in Asia, remains uncertain. Obtaining more clarity on the scope and size of potential tariffs (especially on Chinese goods) will be key. Other Asian economies will be sensitive to direct and indirect impacts of a potential Trade War 2.0, as well as rising U.S. Treasury yields due to debt concerns. In the short term, China, Southeast Asia and Taiwan are more exposed, while India is relatively insulated. In the medium term, as supply chains adjust, there could be significant opportunities for many Asian markets.

For Asia, changes in U.S. trade policy are critical. Investors should consider:

1. Impact of tariffs on China’s economy: Since the onset of Trade War 1.0, the U.S. has increased its weighted average tariff rate on Chinese imports from 3% to 25%. China’s share of U.S. imports has fallen dramatically from over 21% in 2018 to less than 15% today. The proposed 60% tariff on all imports from China would further disrupt China’s economic growth, likely decreasing China’s exports to the U.S. and denting local confidence, investment and consumption. To mitigate the potential impacts, China could respond by: 
   1. Increasing the ongoing fiscal and monetary stimulus
   2. Allowing the Yuan to depreciate as it did in 2018 and 2019
   3. Finding alternative buyers for its goods (as shown on 4Q Guide to Investing in Asia slide 11).
2. Impact of China’s weaker growth on Asia: Exports to China constitute a significant portion of GDP for Southeast Asian countries and Taiwan, making them vulnerable to reduced final and intermediary demand from China. A slowdown in U.S. growth could further exacerbate the decline in exports. Additionally, if the Yuan depreciates, Chinese exports may gain a competitive edge over those from other Asian markets unless these countries' currencies are also allowed to depreciate in tandem. Lastly, business confidence could take a hit. In contrast, India is relatively more insulated from these dynamics due to its lower reliance on goods exports.
3. Impact of tightening financial conditions on Asia: Asia may also be affected by further U.S. dollar strength and higher Treasury yields due to tariffs and debt concerns. These factors may constrain Asian central banks' ability to reduce interest rates, adding another layer of uncertainty for local companies.

In the short term, volatility may remain elevated for Asian currencies and equity markets. However, the region offers numerous investment opportunities due to powerful secular trends, such as:

1. More intra-regional trade
2. Supply chain diversification by multinationals
3. AI-focused tech investment
4. Favorable demographics and
5. Ongoing economic reforms. Consequently, investors might view a market pullback as an opportunity to increase exposure to beneficiaries, like India, North Asia and select Southeast Asian markets.

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