“Liberation Day” tariffs were significantly higher than what the market expected. The impact of these tariffs was especially pronounced in Asia, where most countries in the region run a trade surplus with the US.
Many ASEAN countries and China were particularly affected, facing reciprocal tariffs exceeding 30%. The announcement rattled markets, which are now closely watching how the region responds to Trump’s tariff offensive. Excluding China, most governments have signalled they are unlikely to retaliate. Instead, they appear focused on engaging with the US in negotiations, hoping to secure reduced tariff rates, although the outcome of these negotiations remains highly uncertain. Nonetheless, the newly imposed tariffs are expected to weigh on regional growth. Initial attention will be on which economies face the largest tariff increases, how export-driven these economies are, and whether they can successfully negotiate lower tariffs.
Since the tariff announcement, we have viewed US duration with caution and favoured duration-neutral curve steepeners amid rising stagflation risks in the US. On the Asia local rates front, we retain a positive outlook for several countries that have more policy space to pre-emptively implement monetary and fiscal policy response to absorb any economic drags and disinflationary impacts. Meanwhile, we are closely monitoring conditions in the markets. We are particularly focused on those with shallower market depth in the event global outflows accelerate or if market functioning becomes impaired. We are poised to pare risk if liquidity conditions deteriorate. On the credit side, we are taking a sector-focused approach. We have been trimming exposure to cyclical and trade-related sectors, rotating into non-discretionary and defensive sectors. We are also conducting portfolio reviews to identify and manage idiosyncratic risks, particularly regarding names that may be vulnerable to business cycle pressures, cash flow disruptions or debt rollover risk.
Going forward, our base case is for most economies to negotiate with the US to lower tariffs and thus mitigate much of the impact from the initial announcement. However, significant uncertainty is likely to linger, along with the risk of increased tit-for-tat measures in the near term. Most Asian economies entered this period of higher volatility with relatively robust external, fiscal and domestic demand conditions, which could partially offset tariff-related uncertainties and provide a good buffer against challenges ahead. Notably, China’s policymakers have reportedly already begun discussing stimulus measures. In addition, most regional central banks retain some room to ease monetary policy to support domestic demand, with inflation having declined (giving central banks room to cut rates) in the region. Most Asian corporates and banks also entered 2025 with strong balance sheets and rating buffers, which could help cushion the impact.
We see the recent widening of credit spreads as a healthy development, as it creates more attractive entry points. We also expect favourable demand-supply technicals to support the medium-to-long-term performance of Asian credits. Gross and net supply in Asia credit is still expected to remain benign throughout 2025.
On rates, we maintain that Asia’s local government bonds are well-positioned for decent performance, supported by accommodative central banks in an environment of benign inflation and moderating growth. Concerns over potential growth shocks from US tariffs are likely to provide additional support for regional bond markets. Additionally, with relatively high FX reserves, policymakers are well-equipped to defend their currencies if necessary.
