Three things we are thinking about today
- President Trump follows through on tariffs: US imports from China, Canada and Mexico, which account for 40% of US trade, will be subject to tariffs ranging from 10%–25%. Mexico and Canada have already negotiated a temporary pause in implementation and talks are continuing with China, although their response has been more muted. They will challenge the legality of the tariffs at the World Trade Organization and have created a list of US agricultural imports which could potentially be subject to tariffs.
It remains to be seen whether President Trump’s tariffs are a negotiating tactic, similar to the recent immigration spat with Colombia. We note that immigration across the US-Mexico and US-Canada borders declined sharply in the second half of 2024,1 and China resumed cooperating with the United States on blocking precursor chemicals used to make fentanyl in 2023. While the loss of life from fentanyl remains unacceptably high,2 it has been declining.3 - Lunar New Year consumption: The 2025 Lunar New Year in China lasted for eight days, raising optimism that the longer holiday could boost consumer spending. Our on-the-ground team will be watching the high-frequency and social media data for indications of the turnout. We note that consumption patterns in China are changing with, in particular, the rise of emotional consumption, which many companies are pivoting to focus on. This trend includes increased consumer demand for experiences as well as for low-priced goods.
- DeepSeek sends tremors: The Chinese artificial intelligence (AI) reasoning model DeepSeek is cheaper and more efficient than comparable opensource US models. Compared to peers, it ranks seventh on test criteria in the Large Model Systems (LMSYS) evaluation of chatbots.4 The model’s efficiency is evident in the smaller number of chips used to train the model—2,000, compared to the 16,000 chips that Meta’s Liama model uses—and its use of rounding to reduce the number of calculations required. The near-term impact of the model’s availability is likely to focus on increased innovation globally as companies utilize its open source code.
Outlook
The most recent wave of stimulus programs in China saw a swing from addressing supply issues to stimulating demand. Our portfolio manager for Asian equity markets embarked on a China research trip to get an insider’s view on the consumption landscape and investigate the impact of the stimulus programs.
The trip produced a fundamental observation—consumption trends have shifted. Chinese companies are seeking new avenues to grow. These avenues include entering new segments or expanding overseas.
Bringing China to the world
The portfolio manager met with an expert specializing in cross-border e-commerce. Chinese companies formerly built bases in Mexico. However, potential tariff complications between the United States and Mexico have prompted some Chinese companies to look for alternatives. Interestingly, costs in Mexico are around 20% higher than in China and Southeast Asia. The higher costs include those arising from labor unions. Better cultural fit and natural geographical advantages have now caused Vietnam and Thailand to become top preferences over Mexico.
Apart from these new growth avenues mentioned above, we also think that generative AI could be a tool to expand the reach of Chinese companies. China is making progress, and the state of generative AI today allows Chinese merchants to generate foreign language content on their platforms. This could be an entryway to the pockets of overseas consumers.
Emotional consumption
Travel, pets and blind boxes are recent—yet strong—segments that have emerged in China. Amid an economic slowdown that has caused a weak job market, China’s youth are increasingly spending on figurines and soft toys (also known as guzi) to lighten their moods, or for investment purposes. The latter is especially true for guzi that are highly sought after. Forecasts suggest the guzi market could exceed 300 billion yuan in 2029, growing from a level of 120.1 billion yuan in 2023.5 Even with the lack of government stimulus, the guzi industry is defying the country’s retail slump.
The portfolio manager also met with management of two local hotel chains in China, who reported that leisure travel demand is still very strong. With regard to corporate travel, major Chinese companies are making the switch from Western hotel brands to local hotel chains. One of the companies cited corporate contracts with several well-known Chinese companies. We believe this shift in preference offers opportunities that few investors have considered.
China’s consumption continues to hinge on market sentiment; we concur that it is a challenging environment. However, based on our portfolio manager’s trip to China, we are confident that there are clear trends with select pockets of opportunities in the market.
Market review: January 2025
EM equities rose over the month. US President Donald Trump returned to office for his second term and, in contrast to his earlier stance, issued a broad trade memo that stopped short of immediately imposing new tariffs on key trading partners. While he has gone ahead to enact tariffs on Chinese goods, tariffs on Mexican imports have been delayed. For the month, the MSCI EM Index returned 1.81%, while the MSCI World Index rose by 3.55%.
The emerging Asia region saw gains. China’s fourth-quarter gross domestic product (GDP) growth exceeded expectations and translated into a full-year GDP growth rate of 5%, which matched the government’s target. President Trump’s earlier preference not to impose tariffs on China sent the equity markets into positive territory. Chinese authorities continued to announce policies to shore up growth, which included expanding the scope of home appliances for trade-ins. There were also measures to stabilize the country’s stock markets, such as guidance for listed companies to increase share repurchases. President Trump’s announcement of a new AI infrastructure project lent some support to a wide range of AI chips, including select names in Taiwan and South Korea. However, the release of Chinese startup DeepSeek’s AI models, which have earned recognition for being competitive with and cheaper than other AI applications, caused volatility for AI-related stocks. Indian equities registered losses. Corporate earnings in India and sluggish consumption continued to disappoint investors.
Equities in the emerging Europe, Middle East and Africa region edged higher, aided by a ceasefire deal between Israel and the Hamas militant group, which eased geopolitical tensions. In Saudi Arabia, reports indicate the crown prince would like to expand investment and trade with the United States over the next four years. Saudi Arabia’s economy also returned to growth in 2024, with the non-oil segment registering growth.
Equities in the emerging Latin America region advanced. Brazilian equities regained their footing, and rising metal commodities proved supportive for Brazil’s mining stocks. Brazil’s central bank also raised its benchmark interest rate to anchor inflation. Preliminary estimates showed Mexico’s economy posted its first quarterly contraction since 2021, with GDP falling 0.6% in the fourth quarter on weaker domestic demand and uncertainty over US tariffs.
Endnotes
- Source: US Customs and Border Protection. The December 2024 Monthly Update reported a 60% decrease in encounters between ports of entry along the southwest border from May to December 2024 and a reduction in encounters between Canadian ports of entry of more than 85% over the same period. cbp.gov. January 14, 2025.
- Source: US Centers for Disease Control and Prevention. Data showed there were 89,740 fatal overdoses from fentanyl and all other street drugs in the 12 months to August 2024, down 22% compared to the previous 12-month period.
- The decline in the number of deaths may be attributed to many factors including the increasing availability of the opioid antagonist Naloxone.
- Source: lmsys.org.
- Source: iiMedia Research.
Index Definitions
- The MSCI Emerging Markets Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI All Country World Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global developed and emerging markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI EM Latin America Index captures large- and mid-cap representation across five emerging markets (EM) countries in Latin America. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI Emerging Markets EMEA Index captures large- and mid-cap representation across 11 emerging markets (EM) countries in Europe, the Middle East and Africa (EMEA). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI EM Asia ex Japan Index captures large- and mid-cap representation across two of three developed markets (DM) countries (excluding Japan) and eight emerging markets (EM) countries. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI China Index captures large- and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI Emerging Markets ex-China Index captures large- and mid-cap representation across 23 of the 24 Emerging Markets (EM) countries* excluding China. With 672 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
- The MSCI Mexico Index is designed to measure the performance of the large and mid cap segments of the Mexican market.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.