Investors are bracing themselves for the possible market repercussions of Donald Trump’s return to the White House, particularly with regard to his tariff-led economic and trade policies. And for those looking at Asia ex-Japan equities, India and China offer bright opportunities in building a diversified portfolio.

“Given the volatility and uncertainty we are seeing in the world, the important thing is to have diversification, but when it comes to opportunities in Asia ex-Japan equities, I look at India and China where you really need to consider having position in,” says Yi Ping Liao, assistant portfolio manager and senior research analyst at Franklin Templeton Emerging Markets Equity.

Speaking at the firm’s “2025 Investment Outlook: Perspectives from Asia and Beyond” webinar, Liao believes India is in a “sweet spot” when it comes to the possible adverse impact of US tariffs because its economy is largely domestic-oriented, with domestic consumption accounting for 60-65% of its GDP. This includes spending by households on goods and services such as food, transportation, healthcare, and education. Also, India's large population and growing middle class drive this robust consumption base.

In terms of trade, Liao says, “India is more insulated within the context of the rest of Asia since its economy is very domestically driven. Let's say there's a 60% tariff on China and a 10-20% tariff on the rest of the world including India. Just because of the relative difference in tariffs, we can probably see an acceleration in terms of the supply chain diversification that we've already been seeing.”

Relocation to India

This also means it will still be cheaper for US manufacturers with overseas production facilities to relocate to India versus returning to their home base. One of the objectives of Trump’s highly anticipated tariffs, to be imposed on goods from countries like China, is to encourage American manufacturers to bring production back to the US or shift their supply chains away from heavily exporting nations.

“I just spoke, for example, to a major iPhone assembly company, and they are very comfortable with the ramp up of their Indian facilities and they’re bringing up their iPhone manufacturing portion to 25% in a few years, and this continues,” Liao shares.

Also, Indian equities are expected to get cheaper in the medium to long term following skyrocketing valuations in recent years. The Indian equity market is currently experiencing a cyclical correction with the Nifty 50 and Sensex having declined by 10% after reaching record highs as of September 2024 on the back of rising domestic inflation, weak earnings in certain sectors, and global headwinds like elevated US bond yields and geopolitical tensions.

While this decline has led to capital outflows and investor caution, analysts expect the market to stabilize in the medium term, supported by potential rural demand recovery and increased government spending​.

Scope for China rebound

As for China equities, there is scope for the rebound to continue on a cyclical basis since valuations are very inexpensive, and considering the prospects for the macro economy to stabilize on the back of government reforms.

Liao says the way Franklin Templeton invests in the Chinese equity market is through bottom-up stock picking based on three buckets, namely, companies that take advantage of changes in consumer preferences, companies that are at the forefront of technology, as well as companies that have strong free cash flows and are increasing their payouts to shareholders.

“Companies that benefit from the shift in preference from buying goods, say, designer bags to experiences like travelling domestically. So maybe names like Trip.com. At the forefront of technology, I like CATL, a battery maker that has best-in-class battery technology and are de-risked in the US, and we see more companies with strong cashflows who are increasing their payouts to shareholders,” Liao says.

Regionally, Franklin Templeton continues to see strong impetus for technology development and upgrading, consumer companies benefiting from shift in preference, and the supply chain diversification story which will continue to play out despite all of the near-term concerns about tariffs and trade, as well as volatility.