Examining the impact of higher tariffs on emerging markets

Implications for EM economies and portfolio positioning In Asia and globally

China remains the most exposed. Even before the 2 April announcement, the government had responded to higher tariffs with consumer-focused stimulus, which has the potential to shift the composition of GDP away from exports and toward domestic demand. This will likely benefit sectors like consumer discretionary, while export-heavy areas such as industrials and autos come under pressure. We expect more stimulus looking forward, with measures focused on boosting consumer confidence through trade-in subsidies, lower interest rates, and support for property prices.

The portfolio’s China exposure is concentrated in consumer-facing names such as sportswear, internet, white goods, which are positioned to benefit from further stimulus. Exposure to exporters is modest and position sizes here are carefully managed, with an active underweight position in the manufacturing complex such as autos, where companies are far more exposed to higher tariffs.

Elsewhere in Asia, in India, the portfolio is primarily exposed to domestic banks and to a lesser extent consumer companies such as online travel. With valuations still elevated at around 20x earnings and a softening consumption backdrop, the portfolio had already moved to a small underweight position prior to the tariff announcement. Meanwhile in markets like Taiwan and Korea, these markets face tariffs, although segments of the markets currently see exemptions. The portfolio is underweight both markets, with positions focused on tech hardware names.

Latin America has thus far been a relative beneficiary, particularly Mexico, with USMCA provisions preserved, at least for now. Given Mexico’s deep integration with the US economy, we think that it is likely to emerge as a relative winner from trade tensions. Markets had priced in a worse outcome than what we have seen thus far, creating interesting valuation opportunities. The portfolio is focused on domestic businesses such as airports and consumer companies with US-based production facilities.

Elsewhere, Brazil’s diversified global trade links and ability to fill gaps left by disrupted US exports such as agriculture to China are positives. The portfolio is invested primarily in domestic banks and fintechs, which are largely insulated from tariffs.

In EMEA, CEE economies may see an impact from tariffs imposed on the EU, which could affect growth. Here, our exposure is primarily via banks, rather than export dependent businesses. In South Africa, only a small proportion of exports go to the US, limiting the overall effect of tariffs. As a gold exporter, the country could benefit from increased demand for the safe-haven asset, while many of its critical mineral exports are likely to fall under tariff exemptions.

Our approach

Since the tariffs were announced, we have been focused on assessing both the portfolio holdings and companies on our watch list, working to understand the potential impact of tariffs on these companies. We take into account both the direct impact, but also indirect macro effects such as any change in interest-rate expectations, or the likelihood of a US recession.

We then look at how the share price of companies have reacted, and whether this has resulted in any valuation anomalies, e.g. companies that are likely relatively unaffected by tariffs, but which have sold off considerably, or names that may see a larger impact, but where the share price has held up relatively well.

We then think about whether this could result in opportunities to reallocate to relatively unimpacted stocks that have sold off due to crowded positioning. This is particularly pertinent given that a lot of the moves we have seen have been down to how crowded positioning was, rather than the potential fundamental impact of the tariffs.

In this fast-changing environment, we think it is vital to remain pragmatic, avoid anchoring on any one outcome, and continue to explore a range of scenarios. As a general point, our preference for high-return businesses and aversion to corporate leverage provides an element of resilience in this type of environment.