We don’t pretend to have all the answers on China and the US, and we reserve the right to change our minds – especially as Donald Trump changes his. Amid such market volatility we are not making bold macro calls, instead our focus is on thoughtful, quality-led stock selection.
Overview: Take it back to the stocks
Trade tensions continue to dominate headlines, despite the various 90-day reprieves. Relations between the US and China are clearly evolving, but at the time of writing they do seem to be improving following the de-escalation of tariffs between the two nations, although the sceptic in us wonders for how long.
What we are seeing now is uncertainty layered on top of unpredictability. In this kind of environment, headline-chasing is a fools’ game. Just a year ago ‘Peak China’ was the dominant narrative. Since then, events like the DeepSeek AI breakthrough have reminded investors that China can still innovate, and in many cases lead.
So rather than make grand macro calls, we are focused on tactical upgrades to our portfolios. This means looking for high-conviction, quality names where the risk-reward skew is favourable. The mantra in the Emerging Markets Equities team is not to be afraid to make sales, as long as we are buying better companies on the other side.
US viewpoint: Rewriting the playbook
To understand the US’s stance, it helps to rewind before we look forward. From Ronald Reagan in the 1980s to Donald Trump’s first term in 2016, the US upheld a neoliberal order: low tariffs, free capital movement, flexible foreign exchange and global security guarantees. The idea was simple: help others get rich and they will become reliable partners. Countries such as Germany and Japan got access to US consumers and protection, which in turn drove demand for the dollar, helped finance deficits and underpinned US supremacy.
But all this came at a domestic cost. While US manufacturing weakened and inequality deepened, the more enduring concern became strategic vulnerability. Trump’s push to ‘re-industrialise’ is less about reviving broad-based industry or Midwest jobs and more targeting specific sectors critical to national and economic security. For him, de-industrialisation is a national security risk. The Covid pandemic and subsequent supply chain shocks reinforced the idea that the US needs to secure its own production of critical goods – from antibiotics to semiconductors (but low value goods like shoelaces and T-shirts can remain offshore).
We see Trump’s ‘MAGA masterplan’ unfolding in three acts:
- Tariff chaos – Demonstrate the US is serious, regardless of market reaction.
- Reciprocal tariffs – The goal is to level the playing field. Trump’s first trade war failed because China simply increased exports to Mexico and Vietnam, which then exported to the US. This generates negotiation leverage.
- A Mar-A-Lago accord – Use tariffs as the negotiation tool to reorientate a new economic order. Address unfair practices and encourage appreciation of foreign currencies to rebalance trade, modelled on something similar to the 1985 Plaza Accord1. In exchange, allies get continued access to the US market, dollar system and its security umbrella – possibly at a higher price.
In our view this isn’t just about the balance of trade. It’s about rewriting the terms of the global economy to favour the rule of law, ingenuity and economic resilience – all the while ensuring that the dollar remains dominant but not overvalued.
China viewpoint: Pressure breeds progress US viewpoint: Rewriting the playbook
On China’s side, the strategy is to be patient. While the US is still their biggest trading partner, the Chinese government has been pivoting the economy away from relying on exports to the US. Instead, the focus is on import substitution, supply chain integration and technological self-reliance. Trump’s first presidency, followed by the US semiconductor ban, were the catalysts for an accelerated push into frontier technology. China now leads the world in renewables, high-speed rail and biologics, and views the next wave of artificial intelligence, quantum computing and even humanoid robots as up for grabs (Figure 1).
Figure 1: A long-term growth story
Share of global manufacturing value-added (USD)
Source: WB; Macquarie Global Strategy, 24 March 2025
We concede that China’s economy faces challenges in achieving this goal, such as structurally low consumption. In addition, high household savings, weak rural healthcare and an undeveloped pension system mean that consumer spending remains subdued. Hundreds of millions of Chinese still haven’t reached middle income. As a result, they save more for a safety net, which weakens the domestic demand side of the economy.
Policymakers are aware of this, but the solutions – such as consumption vouchers or demand-side stimulus – are hard to implement effectively. But with one of us having a young baby we can vouch for their impact in boosting consumption – you’re welcome President Xi! The central government has doubled down on its focus on manufacturing growth and technological advancement, with banking loans to manufacturing surging. Real estate, conversely, has been deprioritised.
Internationally, China has deepened its ties with other emerging markets, exporting more to the likes of Brazil, Saudi Arabia, Vietnam, Poland and Russia, which has boosted its overall exports (Figure 2). Even US allies such as Japan and South Korea are increasingly integrated into China’s tech supply chain. While they may not be fully ‘in’, these countries are clearly hedging against the US.
Figure 2: Trading places
China and other exports of goods and services (%)
Source: WB; Macquarie Global Strategy, 24 March 2025
China’s message is clear: We will endure the pain and come out more self-sufficient. Its focus hasn’t been retaliation, but resilience.
What we envisage: A long game with no easy off-ramp
If trade tensions re-escalate, both sides will feel the pain. China, with 38% of its gross domestic product (GDP) tied to trade, may be hit harder in absolute terms. But between 40% and 50% of US manufacturing relies on Chinese inputs, meaning that a full decoupling would likely take more than a decade. In our mind the question isn’t ‘who wins?’ but ‘who can absorb the most pain?’ In the meantime, the rest of the world is watching closely. The EU announced reciprocal tariffs on the US only a few hours before Trump’s 90-day pause, showing their intent, before subtly brushing them under the carpet following the reprieve. It is not a good sign that two of the US’s biggest trading partners are willing to engage in escalating tariffs. Europe and China are also committed to working together, recently agreeing to set a minimum price for Chinese electric vehicles in Europe. Might that encourage the US to focus its gaze on the EU, especially considering US Treasury Secretary Scott Bessent’s ‘collective block’ comments?
We can envisage a world where tariffs are reduced, as ultimately they hurt both sides. However, the finer details of the new multinational norms will be much more challenging to agree upon. This is where the debate should be and until it is resolved we are likely to witness more volatility.
What we've done in portfolios
Rather than making bold macro bets in this foggy environment, we are focussing on quality, conviction and risk-adjusted opportunities.
- We have added to high conviction names that have experienced price dislocations. We have increased exposure to defensive businesses – for example, hard discounters with proven business models and resilience in volatile conditions.
- We have leaned into tariff-insulated markets such as Poland and UAE.
- We upgraded the quality of the portfolio by reducing exposure to companies where their competitive advantage has begun to deteriorate. And we reduced cyclicality in the portfolio by selling technology names amid macro concerns.
The bottom line
The macro backdrop has been challenging, but our discipline and positioning is paying off. Through this period we have remained grounded in our process: upgrade quality, avoid panicking and don’t compromise our conviction. We do not pretend to know how it will all playout, but we do know that quality endures. So while the world debates tariffs and accords, we will keep doing what we do best – stock picking, not guessing.
