Looming Trump Tariffs Rattle Asian Markets
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. President Trump has imposed tariffs on goods from Canada, Mexico, and China. Now, in terms of Canada and Mexico, rates of 25% each. For China, 10%. These tariffs will take effect at 12.01 a.m. Tuesday morning, and they will apply to a wide range of goods. Mexico and Canada have already vowed countermeasures, although China's response to all of this has been a bit more muted.

Bloomberg's Stephen Engel has more from Hong Kong. It is still, you know, wrapping up the Lunar New Year holiday. The markets don't really start getting in full swing until midweek in China. Xi Jinping has not necessarily commented directly on this that we know of.

But Commerce Ministry has. They've expressed the strong dissatisfaction and also vowed corresponding countermeasures, as you rightfully said. They didn't elaborate what those measures might be. They've also pledged to file a complaint at the WTO citing serious violation of international trade agreements.

rules. But, you know, beyond tit for tat retaliation on tariffs, they could expand their export controls on critical minerals. They could restrict market access to some American companies. They could do something with the renminbi, obviously, to cushion the blow on exporters. And that's why we'll be watching the daily fixing later this morning. The offshore yuan approaching that record low right now.

you know, around 7.3. So a number of things they can do. But keep in mind, there could be some benefit here for exporters in China if Trump is going after on a larger scale with Canada and Mexico and vowing to go tough on the EU on the trade front. That could open up export opportunities to those markets for China. So, you know, this is still early days. E-commerce to the United States.

That's one step. There could be further export tariffs from China to the United States, upwards of 60 percent. He's also vowing to further increase those tariffs if there are retaliatory measures from the countries targeted, including China. So we're just in early days here.

Clearly, the Chinese economy is struggling to gain footing of its own making, largely because its export situation has kind of supported at a time, supported the economy at a time when the property sector is still trying to find its footing. And of course, consumer confidence is so weak. So, yes, these tariffs are going to hit the Chinese economy. But I think in these initially it's going to be fairly muted because there's been a lot of front loading of orders, you know, from the United States of Chinese goods,

That was Bloomberg's chief North Asia correspondent, Stephen Engel. So let's take a closer look at the broader market backdrop right now. Joining me from Sydney is Junbei Liu, founder and portfolio manager at Tencap.

Junbei, it's always a pleasure. A lot of volatility at the moment and a little bit of downside here. How do you evaluate what's happening in markets right now? Look, we are actually seeing quite a lot of opportunity at this point. The market is a little bit surprised by the timing of this tariff imposition because obviously we talked about the quantum of it, but how quickly he brought it in has really surprised the market, hence why we see a bit of sell-off. But

you know, net-net, I think it is a little bit harder for investors to call that what the actual tariff will be eventually or whether there may not be any tariff. So, you know, so there's a lot of uncertainty on that front. Hence why we're seeing people taking money off the table. It's been a good, well, it's been a good, you know, equity market for the last year and a bit. So we're just seeing people a little bit nervous. But I think, you know, for a lot of long-term investors like ourselves, we're actually pretty excited about

We think this does represent good buying opportunity, particularly for some of the companies that get potentially get impacted. If they those quality companies with their health care or whether they some consumers names, you know, we will be looking at these opportunities to really pick up, pick up those those those companies. Junbei, you know well how fragile the Chinese economy seems to be right now.

It's been very reliant on export-driven industries. So to what extent could these tariffs threaten to undermine Chinese growth? Look, I think the 10% imposition is not as large as what it could have been. 65% would have been pretty nasty, but 10% is not too bad. I think China is on a slow road to recovery.

You know, we will have to see more stimulus and a consensus are expecting that the first quarter this year that China will come up with more stimulus, obviously targeted more at the consumer and the SMEs. But these should continue to drive recovery there in China or China related equities. I think because the less focus on the heavy, you know, the housing market and then the

and the like, it will see sector-like commodities to be under more volatility pressure because now that we have higher tariff, it's not great for commodity businesses around the world. So it's not just China. So, yeah, so it's just changing the dynamic somewhat. We think China is coming back with more stimulus, but not roaring back. But we will be focusing more on the consumer SMEs,

you know, more structural growers than your cyclical, you know, sort of names like the resources. China, at least for today, is still on holiday for Lunar New Year. I'm curious as to whether or not you are seeing or have seen any high frequency data about the performance of Chinese consumers during this period. How well do you think they've been holding up during the holiday?

Yeah, actually, it's been pretty good for some of the data we've seen. You know, it seems like there's broad-based optimism. However, I think the strength we saw in the December quarter seems to have faltered somewhat, just on the consumer front, but it's still pretty strong. So, you know, we're hopeful when we get the full picture once that's done, you know, that will continue to drive the return of it. But, you know, from

From here, China's recovery is really about the continuous stimulus targeted to consumer, to the SMEs. Without those stimulus, I think confidence is just not yet strong enough to sustain its own recovery.

So we've been talking a little bit about tariffs. We've been talking about U.S.-China relations in regard to those tariffs. But now I'm thinking about U.S.-China relations in regard to artificial intelligence, particularly around last week's story when it comes to deep seek. Do you think this story could result in a lot more strict controls on American technology flowing into China?

Look, I think the story itself is not going to be the trigger of it. However, in the last five years or more than five years, we have seen this decoupling between China and U.S. across many different fronts, whether security, technology, infrastructure, a lot of those has been taking place. And we expect that to continue. And, you know, deep

you know, in my view is that it's really just a sign that, you know, technological advancement, right? At some point, we will have someone come up with a cheaper model. And, you know, whether it's from a Chinese company or from everywhere else,

You know, net net, you know, I don't see that as negative for the growth of the sector because it just makes the AI models cheaper, make it more useful and more people can use it and more consumer can, you know, drive the next leg of uptake. Right. So, you know, it's not negative, but it's yeah. So, you know, the segregation, the decoupling between U.S. and China will continue. Maybe it'll become more rapid.

But or maybe not. And but it just it's it's expected to be a long trend over the next few decades. Before I let you go, I know you're in Sydney and I want to get your take on how well the Australian economy is performing. We know that it's very strongly correlated to the China story. How are things down under right now?

Yeah, interestingly, the Australian economy is actually OK. You know, it's doing quite well and consumer, you know, sort of come back somewhat. And but it's, you know, with the expectation of a rate cut in February, you know, things are looking pretty, pretty good back here. Our equity market optimism returning slightly.

January would deliver a very strong return in January. And we do think this year could be the year for the Aussie market to outperform some of its peers like the U.S. Nasdaq peers. So, yeah, so the market conditions here is good. We expect this reporting season just about to start is going to generate a bit more positivity relative to last reporting season.

You know, earnings would have done a little bit better than expected. And they're holding the margin well. So and also our resources company with commodity prices doing OK is actually expected to pay big dividends again. So, yeah, so we're actually pretty positive over here. Junbei, we'll leave it there. It's always a pleasure. Thanks for making time to catch up with us. Junbei Liu, founder and portfolio manager at Tencap, joining us from Sydney here on the Daybreak Asia podcast.

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Welcome back to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. Joining us now for more on the tariff story and what we can expect from the U.S. side is Stuart Thomas. He is founding partner at Presidian Investments.

Stuart, thank you for making time to chat with us. One of the things that we're seeing right now in terms of immediate knee-jerk fashion is weaker currencies in Canada, Mexico, Europe, as well as a much, much stronger dollar. In fact, the Bloomberg Dollar Spot Index right now is up by around 1%. Is this going to be a major headwind for U.S. multinationals?

Well, look, I don't think any of this comes as a surprise, right? I mean, the fireworks have started. As I always say to everybody, sorry to use the old cliche, but buckle up, it's going to be bumpy.

You know I think long term the trends are in place for a very strong U.S. dollar. You have a hawkish Fed. You had the threat of tariffs which are now actually being implemented. I guess it will happen on this Tuesday. We've got a stronger economy relative to the rest of the world. So you've got all the pieces of the puzzle in place for a very strong U.S. dollar.

Will it be a headwind? You know what? I am not as concerned long term as I think most people are. Again, I think these are knee jerk reactions. Let's think about where this is coming from. President Trump is the penultimate negotiator. This is not about punishing our trade partners. This is about trying to implement fair trade policies.

and stop putting U.S. companies and their workers at a disadvantage. So we're getting an immediate response on the part of both the government in Canada and the government in Mexico. It seems as though retaliatory tariffs will be put in place. This smells a little bit like a trade war rather than a process of negotiation.

Well, you know what, Doug? Let's remember. If Canada, for example, what is it? I think we represent exports to the U.S. represent something like 25%. Maybe it's even higher than that these days.

of their GDP. So I still think this is initial reaction. I think this is to bring everybody back to the table. Nobody wants an extended trade war. It would absolutely impact the US market over the long term. So I think this is to get everybody back to the table. We knew they would react in this fashion, but I don't believe it's going to hurt them a lot worse than it will hurt us. And that's

That's not to say that we want to be in an extended trade war here, but I think it's to bring people back to the table. No one should be surprised by the retaliation. So I hear what you're saying in terms of a negotiating strategy, but let's assume for a moment that the process takes...

several months. And in that period, there are inflationary pressures that begin to seep through here. I'll use one example. Wolf Research was saying the average price of a new car in the U.S. may climb by around $3,000. Does the inflationary, even though it may be kind of short term, does that concern you in the least? Well, it does, because ultimately that impacts our GDP. I mean, a prolonged trade war could peel off 100 basis points of GDP for us. But

I think what you're going to see, I think there are going to be a lot of benefits. Again, we're all guessing at where this is going. I think it's to bring people back to the table to negotiate and unfair trade policies. I like it short term, not obviously long term. We've seen this type of action before. If Canadian companies hadn't already been considering moving business and manufacturing to the U.S., they sure as heck will now.

So I think it could ultimately be a big benefit to us, but an extended trade war, to your point, will absolutely peel off GDP. I think the price action in the bond market is going to be particularly interesting. On one hand, there may be some haven buying, people wanting to reduce their exposure to risk. The other tension is going to come from the implicit inflationary impact of tariffs. What do you think is going to happen to the interest rate environment?

Well, I mean, I think we're already seeing that. But first and foremost, we've got a lot more flexibility here than either Canada or China, for that matter, or Mexico. We've got all of the elements in place for a strong U.S. dollar. And we have reiterated, both the Treasury Secretary and President Trump have reiterated our commitment to ensuring that the U.S. dollar remains the reserve currency of the world.

That is going to still drive in a risk on situation, risk off situation is going to drive people to U.S. bond market. So if you were putting a strategy together, given the current environment, what assets, what instruments would you be deploying right now as a part of that? Well, I'd like to I'd like to take it, Doug, if you don't mind, and just a slightly different, different avenue here, because.

One of the things that really concerns me most is that, and this is one of the things you and I were talking about before, most U.S. investors don't even understand the implications of a strong U.S. dollar policy and a falling foreign currency

the impact that it has on the returns of their international investments. So if I could take it in a different direction and say, I think we need to start raising awareness because we've done an awful job of that, especially when it comes to the equity side of the equation, where people own ADRs and it's understandable why they may think they don't have the risk, right? U.S. listed securities traded in U.S. dollars

They don't understand that they've got risks. So I want to raise a cautionary flag here and say, you need to reevaluate your portfolio. All of us own international equities and fixed income for that matter. When you own international equities in particular through ADRs or foreign ordinary shares, you have to be aware of the fact that you have dollar for dollar exposure to the local currency, whether it be sterling, euro, yen, peso, whatever it happens to be. So

I would say, take a look at your portfolio. Take a look at your international investments in particular. Even if you own U.S. listed securities, ADRs in particular, you have currency risk. And I would caution you going forward to bet against the U.S. dollar. Okay. So that's a hedging strategy. That's my takeaway. Talk a little bit more about what that might look like. What is the shape of a good, effective hedging strategy these days?

Well, it's, you know, we talk about hedging strategy, but for the average U.S. investor, there is no way to hedge individual positions, at least until now. So if you need exposure to a particular region, there are ETFs out there that are hedged versus an entire index.

And then recently we launched a whole series, a whole new series of products called ADR hedged ETFs, which are simply the underlying ADR plus a currency hedge overlay to mitigate the volatility between the US dollar and the local currency.

So first and foremost, when you're taking a look at international equities in particular and identifying a company, what you want to know is, do I want currency risk or not? And for most investors, the answer is you shouldn't. The de facto position really should be, I want to hedge security. The only people that should be buying ADRs are people that

want to actively take currency risk versus a local currency. Stuart, we'll leave it there. Thank you so much for joining us, helping us understand market dynamics during the time of tariffs. Stuart Thomas there, founding partner at Presidian Investments, joining us here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

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