To The Moon

16 Dec 2024

Trump 2.0 will not be the only catalyst for fundamental change

By Asian Equity Team

Trump 2.0 will not be the only catalyst for fundamental change

Many may expect the incoming Trump administration's transactional approach to be detrimental to the geopolitical and macroeconomic landscapes. However, we believe that Washington's mercantilist stance should not prevent Asian markets from offering attractive absolute returns, as was the case during the 2017-2021 period under Trump's first term.

What’s changing in Asia: a broad outlook for the year ahead 

As another year goes by, we are once again reminded that change really is the only constant. This reinforces our belief in our investment philosophy: identifying companies that exhibit the best blend of fundamental change, sustainable* returns and attractive valuations.   

After three years of tightening monetary policy, central banks worldwide have begun to ease. While we do not claim to be macroeconomic forecasters, a sustained shift in the global monetary cycle would be a welcome boost for many areas within our investment universe. The Federal Reserve’s decision to lower interest rates has allowed many Asian central banks to follow suit, although this is likely a shallow easing cycle. This environment is typically the most positive for twin deficit economies, such as India and parts of ASEAN, which have both fiscal and current account shortfalls and are more sensitive to the global price of money.  This environment also favours less liquid parts of the market like small market capitalisation stocks (small companies [ 1 ] ) and highly interest rate-sensitive securities such as real estate investment trusts (REITs). We provide more detailed analyses within the separate sections of this report as well as links to our relevant insight pieces.  

The potential benefits mentioned above may be somewhat tempered by the highly unpredictable nature of Donald Trump’s second term as US president. Trump’s election campaign once again focused on protectionism, “America First” and immigration, and there is likely to be increasing volatility across global markets. Predicting the Trump administration’s next move is likely a fool’s errand, but several fundamental changes look set to affect earnings and returns across Asian markets. The strongest impact could be felt in the energy, trade and defence sectors (Chart 1) as the US again turns inwards. For most of Washington’s allies, unconditional US support is no longer a given (please see: If Trump wins: uncertainties and opportunities from an Asian equity perspective ). 

Chart 1: Defence spending as percentage of GDP (Gross Domestic Product) 

We would like to emphasise, however, that it is far from certain whether “Trump 2.0” will have a net negative impact on emerging and Asian markets. During Trump’s first term (January 2017-January 2021), China outperformed both the Standard and Poor's 500 (S&P 500) [ 2 ] and all the perceived “China plus one [ 3 ] ” beneficiaries (Chart 2).    

Chart 2: Returns of major indices during Trump’s first term      

The key takeaway here is that Trump is not the only potential catalyst for fundamental change; in China’s case, domestic policy will be paramount. We believe that, unlike during the first Trump administration, Chinese equities have already factored in a much higher risk premium for trade disruptions (please see the China outlook section below).  

Opportunities in China likely remain in areas of self-sufficiency and industries that have undergone consolidation. We also see opportunities in Chinese companies with strong cash flow generation that can support organic expansion, dividend payouts and continued buybacks. Elsewhere, we are focused on supply chain diversification, particularly in Asian regions where trade balances with the US are still negligible and where countries offer a clear alternative to China-based production (Chart 3). India, in particular, appears well-positioned to capture further opportunities, as do parts of ASEAN.  

Chart 3: US trade deficit with Asia and Mexico as a percentage of total 

India: growth with reservations 

India, as we often say, is one of the richest sources of both sustainable* returns and fundamental change. However, the challenge lies in finding these opportunities at a good price. Fortunately for patient investors, such an opportunity may be emerging. While US elections took centre stage in 2024, there was also an election in India, the world’s largest democracy. This resulted in Prime Minister Narendra Modi returning for a third term, although this was notably as part of a coalition government rather than with a majority. This will likely limit Modi’s ability to implement more significant positive structural reforms.   

In contrast to other Asian economies, the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) have been proactively regulating their respective markets, which could curtail growth in certain areas. Additionally, as the economy becomes increasingly digital, this fundamental change is profoundly impacting long-established traditional distribution channels and brand moats—elements that have benefitted several companies for decades.  

Given the lofty starting point, some consolidation in local equity markets would be welcome. We will be ready with our wish list of high-quality stocks. Despite some short-term reservations, we believe that India remains one of the most compelling long-term investment opportunities in Asia. One area of the Indian market which tends to be overlooked but may be attracting interest is the IT services sector.  

Artificial Intelligence (AI): are we transitioning to the next level of development? 

As staggering levels of capital expenditure are invested in generative AI development, the market has begun to rightfully question whether Big Tech’s investment will yield the desired returns, and importantly, when? Looking at Big Tech’s capital expenditure (capex) in relation to operational cash flow, we are not yet at unsustainable levels (Chart 4).  

Chart 4: Big Tech’s capex/operating cash flow*

Moreover, AI appears to be fuelling competition among tech giants as they encroach on each other’s territory. This is a race they cannot afford to lose, and their spending is not disproportionate to the current cash generation or stock. This should be positive for Asia’s AI “picks and shovels” companies, which have been benefiting for some time (please see: Picks and shovels approach: Investing in AI ). The greater fundamental changes from here, however, are likely to emerge in the form of applications, new tools and businesses that can best harness these technological advancements.   

Reference to any particular security is purely for illustrative purposes only and does not constitute a recommendation to buy, sell or hold any security or to be relied upon as financial advice in any way.  

Where does AI hold the most potential for fundamental change in Asia? Beyond hardware technology, we are increasingly focusing on the areas of eGaming, software and IT services. According to a recent Gartner survey, the number of US chief executive officers who think AI will impact their businesses has surged from 21% in 2023 to 75% in 2024 (please see: CEO Stance on AI: How Your CEO Is Thinking About AI ). Several Asian companies, like Tata Consultancy Services, Infosys, Tech Mahindra and Wipro, are addressing this growing demand and have been named partners for NVIDIA’s AI agent program for specific industries (please see: Consulting Giants Team With NVIDIA to Transform India Into Front Office for AI Era | NVIDIA Blog ). Together, these companies are training half a million staff on generative AI models like Nemo and GPT.   

Changing energy markets 

Unlike past technological “leaps”, the impact of AI is being felt across many more areas of the economy, particularly   on power demand. Our outlook for 2024 emphasised how resource-intensive generative AI has become. Combined with growing demand for energy security and transition, numerous strains and bottlenecks are appearing across the energy sector and the capex spectrum related to it. Big Tech, however, will not sit idly and wait for resolutions. In recent months we have witnessed the revival of nuclear demand. Tech giants such as Google, Amazon and Microsoft are expanding research into small modular reactors (SMRs) and reviving mothballed nuclear plants. In Asia, several governments are reevaluating their stance on nuclear energy, driven by concerns over energy security and the needs of power-hungry industries.   

Closer to Singapore, where our team is based, this shift in energy market dynamics has resulted in significant activity across the causeway in Johor, Malaysia. With the Malaysian government opening its doors to foreign investment, Johor is fast becoming ASEAN’s global data centre hub, attracting both US and Chinese cloud computing and service providers. However, such growth also brings its own challenges in terms of power and resource consumption. We continue to see significant fundamental changes across the energy spectrum, and we are focusing on several subsectors where specific companies are well-placed to generate higher, sustainable* returns.  

[ 1 ] Companies with market capitalisations of over US dollar (USD) 100 million but less than USD 2 billion

[ 2 ] A stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.3 China Plus One, also known simply as Plus One or C+1, is the business strategy to avoid investing only in China and diversify business into other countries, or to channel investments into manufacturing in other promising developing economies such as India, Thailand, Turkey or Vietnam.

[ 3 ] China Plus One, also known simply as Plus One or C+1, is the business strategy to avoid investing only in China and diversify business into other countries, or to channel investments into manufacturing in other promising developing economies such as India, Thailand, Turkey or Vietnam.

[ * ] “sustainable" refers to the durability of returns based on our fundamental assessment, not environmental sustainable

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