J.P. Morgan wrote in its analyst report, citing that a delay in new tariffs between the US and China has made investors more optimistic, causing stock markets to go up. Thus, the equity markets are less worried about a US recession for the time being.
However, the current environment is still challenging even with the delay. There are still existing universal tariffs of 10%, and tensions between the US and China are high. This could hurt businesses and investors sentiment in the mid-term. Also, people in ASEAN countries might buy less due to a slowdown in demand, which would also damage company earnings.
In terms of government and central bank responses, the report notes that as growth risks increase, fiscal support has begun—although it’s anticipated to be inadequate. Instead, the primary policy response is expected to come from the monetary side, with restrictive stances being eased—likely meaning lower interest rates and easier borrowing conditions.
The shift in investment advice is quite specific. J.P. Morgan is moving to a Neutral stance across most ASEAN countries, with the exceptions of Thailand (Underweight) and Singapore (Overweight). This change reflects the heightened uncertainty in the market.
The report also outlines specific sector allocation changes: Consumer Staples are upgraded to Overweight (OW), and Real Estate is moved to Neutral. Conversely, Industrials and Financials are downgraded to Neutral. The overall investment strategy prioritizes safety over potentially higher returns until greater clarity emerges, favoring cash, defensive stocks, companies with domestic exposure, and those with strong individual earnings momentum.
The report reiterates that tariffs remain a significant issue. Even with potential negotiated deals and the delay, tariff rates are still expected to be substantially higher than at the end of 2024. The impact of these tariffs, coupled with reduced capital expenditure due to uncertainty about returns on investment, could still push the US economy into a recession later in the year, leading to a de-rating of equities globally.
Importantly, the report points out that the current situation differs from the 2018–19 trade war, where some ASEAN countries benefited from supply chain shifts, as the current tariffs are expected to be applied more broadly.
While a weaker US dollar and lower US yields are generally seen as beneficial for ASEAN, the report cautions that the prospect of a weaker global trade environment is detrimental to equity earnings. This weaker trade environment increases the probability of a profit recession.
The report includes a “playbook for a US slowdown or recession.” Although the likelihood of this scenario has decreased with the tariff delay, ongoing uncertainty related to US-China trade actions could still trigger a significant market repricing. Based on historical data, certain country sectors in ASEAN tend to offer “shelter” during a US recession:
- Thailand: Industrials, Telecom, Staples, Utilities
- Indonesia: Staples
- Philippines: Financials, Consumer Discretionary
- Malaysia: Utilities
These sectors have historically outperformed the MSCI ASEAN index by more than 3% over 50% of the time during US slowdowns. However, the report clarifies that they are not advocating for complete directional decoupling during recessions.
Finally, the report highlights the upside risk associated with trade deals. While individual agreements might not eliminate all tariffs or drastically boost global growth, a bilateral agreement with the US could provide significant first-mover advantages for the involved country. These benefits could include a surge in export orders for the manufacturing sector, greater clarity for foreign direct investment (FDI) flows, and a lower risk premium for equity markets. This could potentially lead to renewed growth and substantial capital inflows—especially considering that global investor positioning in ASEAN is currently near record lows. Any positive shifts could therefore result in significant market outperformance.
