Southeast Asian Equities: Caution Pending U.S. Tariffs

Overweight exposure in the portfolio to South Korea and Southeast Asia. Exposure to China increased. Further downside risks for the U.S. dollar.

by Marcel Zimmermann, manager of the Lemanik Asian Opportunity fund at Lemanik

In February, foreign investors sold their positions in Indonesia, Thailand and the Philippines. We attribute this trend to investors’ continuing fear of a possible extension of U.S. tariffs to other Asian countries. Stock market volatility increased during February, with a sharp global sell-off at the end of the month, when President Trump announced an increase in tariffs on China from 10% to 20%. The announced tariffs on Mexico and Canada were also confirmed.

The U.S. dollar began to weaken as U.S. economic data started to show signs of labor-market weakness and upward pressure on prices. In addition, its aggressive, expansionist foreign policy toward Ukraine, Panama and Greenland has clearly begun to undermine confidence in the long-standing U.S. policy toward its allies. The flow of economic data in Asia has slowed to a stable picture. In Japan, unemployment fell in January and consumer spending increased, while inflation appears to be well anchored. The central banks of South Korea and Thailand cut interest rates by 25 basis points to support growth. The South Korea PMI moved into expansionary territory.

In February, we further increased our exposure to China. We continue to hold an overweight exposure to South Korea and Southeast Asia. These regions remain very attractive from a fundamentals and valuation perspective. Thailand, Indonesia and the Philippines are relatively closed economies and should be less affected by the global application of U.S. tariffs. We expect foreign direct investment to further diversify production facilities across Asia. We see further downside risks for the U.S. dollar if the negative trend in U.S. economic data continues to point toward weakness and the confidence of its long-term political allies is further undermined by the United States’ aggressive trade and geopolitical policy. We are considering increasing currency hedges further.