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Morgan Stanley Asia EM Equity Strategy: Tariffs Approaching

Key Takeaways

• Tariff Clarity: Await clarity on US potential tariffs on Mexico, Canada, China, semiconductors, pharmaceuticals, and metals.
• Fast Announcement, Slow Implementation: Base case for tariffs (Trump administration).
• Risk Exposure: Companies with >10% US revenue exposure or in tariff-sensitive sectors face higher risks.
• Supply Chain Diversification: Sectors and companies shifting away from US dependency may be advantaged as tariffs materialize.

Risk Assessment by Market

• Highest Exposure: Taiwan, South Korea, India, China (for semiconductor hardware/equipment).
• Moderate Exposure: Japan, Mexico, Brazil, Australia.
• Lowest Tariff Risk: Market-oriented companies with higher domestic production.

Supply Chain Diversification Beneficiaries

• Industries: Semis & Equipment (e.g., chipmakers Taiwan, South Korea).
• Markets: India, ASEAN, specific regions in Japan and Australia.
• Performance: Supply chain diversification companies have outperformed EM indices by 27 percentage points since 2023.

Key Sectors at Risk

• Semiconductors, critical minerals, autos, pharmaceuticals.
• Potential Disruptions: Shipping controls and trade restrictions on Chinese companies.

Analyst Recommendations

• Reiterate caution on China, Taiwan, and Semis; caution against Semis/HW in China due to export controls.

Valuation Summary

• China: Cheap vs. historical (7th percentile P/E).
• Taiwan: Expensive vs. history (reflects ongoing profitability trends).
• MX/Middle East: Undervalued (extremely cheap on P/E ratios).

Market Positioning & Fund Flows

• Overweights Persist: EM funds moderately overweight Semiconductors, Mexico, and China.
• Underweight Risk: Companies with high US export reliance may face selling pressure if tariffs escalate.

Analyst Disclosures

Independent analysts: Daniel K Blake, Jonathan F Garner, Kristal Ji, Crystal Ng. Please note potential conflicts of interest where applicable.

Investment Considerations

• Portfolios should account for tariff risks in exposed markets.
• Supply chain resilience may yield long-term alpha if manufacturing shifts toward less dependent regions.
• Caution around tech hardware & software, and South Korea if broader tariffs are implemented.

For detailed company-level risk assessment [See Exhibit 6], contact your Morgan Stanley Relationship Manager for the full report and analysis.

Disclaimer

Morgan Stanley Research is meant for institutional/informed investors. Trade decisions require independent analysis tailored to individual circumstances. This summary does not constitute investment advice.