Rethinking the Trump 2.0 playbook

Investors entered the Trump 2.0 era positioned for more tariffs (especially targeted at China), higher inflation and a stronger US dollar (USD). Against this backdrop, investors had viewed US equities and the USD more favourably than Asian and Emerging Markets (EM) assets.

Although Trump has since imposed 10% tariffs on imports from China, the rising risks to the US growth narrative potentially warrant a rethink of the earlier playbook. The recent wobble in US AI stocks, triggered by Chinese AI lab Deepseek, also highlights the risks of crowded trades and concentrated positions. Analysis by our quantitative equity strategies team showed that despite the overall decline in the S&P 500 and sharp falls experienced by AI-related stocks on 27 January, about 70% of the S&P 500 constituents ended the day higher, demonstrating the importance of diversification in portfolios.

The US has enjoyed a period of tremendous growth and although the US economy is likely to remain the strongest within the G10 in 2025, risks to the highly consensus view of “US exceptionalism” is rising. Much of the US’ strong growth has been driven by productivity gains, of which imported labour played an important role. As such, the Trump administration’s plans to restrict immigration could constrain US growth over the medium term. Tariffs will also be an additional burden on the US consumer if they ignite inflationary pressures. If President Trump’s 25% tariffs on Mexico and Canada with a 10% rate for energy imports are followed through, these tariffs along with the 10% tariff on China could reduce US growth by 0.3% to 0.8% and increase US inflation by 0.4% to 0.8% on an annual basis.

Following Trump’s re-election, expectations of US tax cuts and deregulation, which are seen as stimulatory for US growth and inflation, had driven US assets and the dollar higher. The dollar index is near record highs not seen since 1985 and 2002. See Fig. 1. Although the Federal Reserve (Fed) kept interest rates on hold in January, further rate cuts cannot be ruled out in 2025 if the US unemployment rate rises. This could weaken the dollar, albeit not too drastically, as other central banks are also expected to cut rates. A peak in the dollar has historically been favourable for Asian and EM assets.

Fig. 1. Dollar Index

Source: Tradingeconomics.com. January 2025.

Besides tariffs, geopolitics, USD strength and China policy shifts are among the many other factors that could drive the markets this year. See Fig. 2.

Fig. 2. What do you think will be the key market driver in 2025?

Source: Eastspring Investments. Poll was taken at Eastspring Investments’ 2025 Market Outlook events in Singapore and Hong Kong in January which were attended by more than 100 institutional investors.

Given that markets are likely to stay volatile, there are several key considerations for investors. Firstly, US equities and the US dollar are expensive; historically, buying undervalued assets has proven more beneficial in the long run. Secondly, while the dominance of momentum trading over the past three years has reduced diversification in common indices, our multi-asset team stresses the importance of diversification and risk management even more during periods of high policy uncertainty. Equities that pay dividends and exhibit low volatility can help to reduce overall portfolio risk. Meanwhile, the relatively low valuations of EM equities present a stark contrast to the high prices of US equities. As Asia and EMs have the potential to exceed expectations, they can provide genuine diversification benefits for investors.

Active investing will be even more critical for investors in 2025. With tariff uncertainty looming at the regional/country level, the environment would be challenging for index returns and passive investing.

Despite the potential challenges at the country and regional levels in Asia and the EMs, our investment teams are leveraging on the following idiosyncratic drivers to uncover alpha opportunities at the security level:

Fig. 3. Idiosyncratic drivers and opportunities

Source: Eastspring Investments. January 2025.

The path forward for Asia and EMs will depend on the interplay between Fed policy, regional dynamics, and evolving investor sentiment. Incoming data on US unemployment will play a pivotal role in shaping the Fed's decisions. While the Federal Open Market Committee’s (FOMC) January statement and Chair Powell’s press conference included significant changes that the market perceived as slightly hawkish, leading to reduced expectations for rate cuts this year, we interpret Chair Powell's stance as still leaning towards a dovish outlook. The Fed is closely monitoring data to decide its next move, particularly showing sensitivity to any potential weaknesses in the labour market. This suggests that even if a rate cut in March is unlikely, a cut in May remains a possibility. Asia and EMs are well positioned to benefit from a shift to US lower rates and a weaker USD.

This commentary leverages on some of the key insights that were shared during Eastspring’s 2025 Market Outlook events held in Singapore and Hong Kong in January.