Fundamental investors in Asia, much like the rest of the world, have faced challenges this year due to ongoing tariff uncertainty with the US.
However, Andrew Swan, portfolio manager of the Asia Opportunities Fund at Man GLG, said the region has already shown remarkable resilience and could gain even more.
“Markets in Asia have been resilient and continue to push to new record highs despite global politics, US tariffs and general weakness,” he said.
Historically, Asian emerging markets (EMs) have benefited from a weak US dollar. This is because a weaker dollar encourages capital to flow out of the US and back into these markets, which in turn eases their financial conditions.
Though this has remained true so far this year, Swan noted an added complexity which is introducing new winners.
“Normally you would also have lower rates, [but] they have not come through to the degree you would expect within a weaker dollar,” he said.
In turn, Swan explained that correlations between asset prices have been inverted in many places, creating a problem for a lot of investors. That is, while Asian markets have seen gains this year, the countries driving these increases have deviated from historical trends.
“It’s actually developed markets within Asia that have led the recovery, places like Korea and Taiwan, as opposed to more emerging markets … places like Indonesia and the Philippines,” he said.
For Swan, the key question is whether the correlations between the weak dollar and US rates are going to sustain, or if this is just a short-term phenomenon.
Based on what we know so far, he said that hedging activities by investors – especially the long dollar position which has been building up for a long time – have become a primary driver in shaping how various asset classes respond to dollar fluctuations.
He pointed to the unprecedented two-day surge in Taiwan’s currency back in May, which saw the Taiwan dollar gain 8 per cent against the US dollar.
He explained that the Taiwanese economy had been running 10 to 12 per cent surpluses versus the US for a very long time, building up these dollars, while domestically there had been virtually zero growth. As a result, investors had started to invest more in the US.
While Taiwan’s central bank denied the White House was pressing for a rise in some Asian currencies as part of a trade deal, Swan said the rapid surge was symbolic.
“What the Taiwanese central bank really did was send a warning shot across the bow for financial players, in general, that they cannot rely on this US dollar strength anymore,” Swan said.
Meanwhile, he highlighted China’s significant (and unusual) exposure to the weakening US dollar, which has led Chinese policymakers to prioritise currency stability over the last 18 months by running high real interest rates.
“It is a positive for the whole region, not just the smaller economies, but also the larger economies. And if perhaps this period of a weak dollar will persist, it will be a nice tailwind for the region,” he said.
In his view, Asian currencies stand to appreciate “quite significantly” from where they are, which will ease financial conditions.
Ultimately, the move in the dollar is extremely important, and how financial players in Asia are responding to that has big implications for equity growth.
Looking forward, he said the announcement of China’s next five-year plan is the space to watch. From an investor’s perspective, the key question is whether or not China will start to take their consumption issue seriously and work on pivoting the economy.
“The big, beautiful story, I guess, is that America starts to move more towards investment and less consumption, and China starts to move more towards consumption and less investment.”
