09-06-2025
Adrian Mowat on why non-US assets are becoming more appealing than US equities & bonds
Adrian Mowat
, EM-Equity Strategist, says the US economy continues to grow, but high inflation persists alongside a flat 10% tariff on all imports, making the Federal Reserve cautious. With potential rate cuts by the European Central Bank and the Bank of England, along with easing in major
emerging markets
like India and China,
non-US assets
are becoming more appealing than
US equities
and bonds.
What can we expect to hear from the US-China meeting? What could be the possible talking points on the agenda today? Do you believe the rare earth metals issue could finally be addressed and we could have some clarity there?
Adrian Mowat:
I am not overly optimistic about the meeting between the US and China. The Chinese are very well prepared for the trade dispute that is in place. I do not think they are going to roll over and give significant concessions particularly around tariff levels. There may be a few token concessions with regards to non-tariff issues like restricting rare earths and as I look at capital markets which essentially seem to have priced out any trade dispute now and have a very optimistic outlook, I would tend to be a little bit more cautious about risk assets when they are taking such an optimistic view. As I said, the Chinese are very well prepared for this dispute with the US and it is not in their interest to give concessions that are one-sided. So, the negotiations could prove to be pretty tough.
Give us some sense on how do you see the fund flow shaping up between the US markets as well as emerging markets because we do see a strong May jobs data and the trade talks are on, while because of the rate cuts some of the emerging markets are getting a fillip including India.
Adrian Mowat:
The labour market data looked good, but if you looked at the revisions, there were quite significant down revisions of job growth and there was something like 300,000 layoffs. So, we are beginning to see some evidence of a weakening US economy. Now with regards to fund flows, they are going to be quite favourable for emerging markets including India. We have a weak dollar and that gives flexibility and the RBI highlighted that flexibility with a 50 basis point cut in interest rates in India.
The Indian Rupee which had been relatively weak up until a few months ago is strengthening in line with other currencies that are strengthening versus the US dollar. This puts emerging markets very much back in favour again and India as one of the major emerging markets is going to be a beneficiary of that as will China and as will Brazil, etc. When I think about this situation, if we can have a US economy that is slowing, and a weak dollar, and the rest of the world doing okay and managing around these trade disputes, then EM equities do very well.
When you think about flow of funds, we have lived in a world where dollar assets have been favoured for many years and many investors have sat with unhedged positions on long dollar assets. Their lack of hedging is a problem now as when they convert their gains into their own currency, it is much lower because the currencies are appreciating. So, the flow of funds out of US assets has really just started and that will favour emerging markets both for debt and equity.
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I would also highlight that when we look at the tariff story and this trade dispute, we are focusing on that too much and not enough on how serious fiscal positions are in the developed world. The issue with fiscal positions is this movement away between a
primary deficit
that does not look too bad, but a rapidly expanding secondary deficit. Since the price of money has gone up, borrowing costs have gone up and the level of debt has gone up that the real fiscal strain is the interest burden and we need to see fiscal reductions and we are going to see less spending, more taxes in the United States, to a lesser extent in Europe, maybe more concentrated places like the UK where the fiscal position is weaker.
Again that makes emerging markets look more favourable because they do not seem to have the same stress. India is cutting rates, China has been cutting rates. So, there is a very nice setup in place here. We are going to get a better opportunity though to add EM risk because I expect these trade deals to prove more difficult between Europe and the United States and between China and the United States and that might provide an opportunity to add more risk in EMs. But I am pretty bullish about the EM story.
When we started off, you were talking about what the central bank positioning has been and just this week you have got the BOJ, the ECB, the BOE representatives speaking. At a time when pretty much all central banks are easing rates, why is the BOJ and the Fed still holding fire?
Adrian Mowat:
Remember, the BOJ is trying to tighten and not loosen monetary policy. And there are good arguments for them to be cautious in tightening policy as there is already an implicit tightening in the fact that the yen has been appreciating versus the US dollar. As for the Fed, we were referring earlier to the job data. The US economy is still expanding and inflation still remains high and the impact of the trade dispute and higher tariffs and remember we have got a flat 10% tariff on all imports coming into the United States.
The Fed is understandably cautious about the inflationary impact of that, but let us go back and think about this move from dollar assets, from US equities and US bonds into other assets. If I have got the European Central Bank cutting rates, possibly Bank of England cutting rates, we have got easing in the major EM whether that is India or China – it makes these other markets, other assets look a lot more attractive than having US equities, US bonds.
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