Navigating the Tariff Shock: How Asian Hedge Funds Are Betting Big on Japan and India

The global economic landscape in early 2025 was upended by U.S. President Donald Trump’s sweeping tariffs, which triggered a seismic shift in trade flows and investment strategies. Asian hedge funds, seeking refuge from the turmoil, have pivoted aggressively toward Japan and India, positioning these economies as critical hubs in the new era of trade tensions. Morgan Stanley’s recent analysis underscores this strategic realignment, revealing a stark divide between markets benefiting from renegotiated trade deals and those caught in the crossfire of U.S.-China hostilities.

Japan: A Resurgent Market Amid Volatility

Following the April 2 “Liberation Day” tariff announcement, Japan’s equity markets initially faltered, with the Nikkei 225 index hitting an eight-month low. However, a rapid recovery followed as hedge funds piled into materials, technology, and industrials sectors, betting on Japan’s ability to navigate trade negotiations with the U.S. The Nikkei fully erased its post-tariff losses by mid-April, ending the month slightly positive—a stark contrast to the broader market selloff.

Why Japan?
- Trade leverage: Japan’s exclusion from the 90-day tariff pause for most countries (except China) positioned it as a potential beneficiary of U.S. trade renegotiations.
- Sector resilience: Industrial and tech stocks, such as those in robotics and semiconductors, attracted inflows due to their global supply-chain relevance.
- Valuation appeal: Japanese equities traded at discounts compared to U.S. markets, making them attractive amid global risk aversion.

However, risks linger. The Bank of Japan has warned of heightened uncertainty, citing U.S. policy shifts as a key vulnerability.

India: The Supply-Chain Darling of the Tariff Era

India’s rise as a preferred investment destination has been nothing short of dramatic. The NIFTY 50 index surged over 3% in April 2025, among the first global markets to rebound post-tariff shock. Hedge funds flocked to Indian equities, capitalizing on its dual advantages: strategic trade positioning and long-term growth potential.

Key drivers include:
1. Manufacturing momentum: U.S. tariffs forced companies like Apple to accelerate production shifts to India, with iPhone assembly there doubling to 20% of global output by March 2025.
2. Trade arbitrage: Chinese firms, facing retaliatory 125% tariffs, outsourced U.S.-bound orders to Indian partners, boosting India’s trade surplus with the U.S. to $47 billion in 2024.
3. Policy tailwinds: U.S.-India trade talks advanced rapidly, with Treasury Secretary Scott Bessent signaling a “near-finalized” deal focused on simplified tariff reductions—a stark contrast to China’s complex trade barriers.

Despite logistical hurdles—such as reliance on Chinese components—India’s structural shift toward manufacturing autonomy has solidified its role as a global supply-chain alternative.

The Global Context: Tariffs Take a Toll

The IMF’s April 2025 World Economic Outlook painted a grim picture of tariff-driven damage:
- Global growth downgraded to 2.8% in 2025 and 3% in 2026, with the U.S. projected to grow just 1.8% in 2025.
- China’s slowdown: Second-quarter GDP growth is expected to weaken further, as tariff retaliation and supply-chain disruptions bite.
- Emerging market divergence: While Japan and India thrived, Australia and China faced capital outflows, with hedge funds reducing exposure to their equities.

Challenges Ahead

The path to long-term gains isn’t without obstacles:
- Supply-chain dependency: India’s manufacturing ambitions depend on building local component ecosystems—a process estimated to take “years or decades.”
- Geopolitical risks: Trump’s public clashes with the Federal Reserve (e.g., criticizing Chair Jerome Powell) added volatility, with U.S. stock markets dipping further.
- Market overreach: While Japan and India outperformed, their gains remain tied to geopolitical developments, leaving them vulnerable to policy reversals.

Conclusion: A New Paradigm for Asian Markets

The 2025 tariff shock has crystallized a clear investment narrative: Japan and India are the pivot points in a global realignment of trade and capital flows. Supported by hedge fund inflows, strategic trade deals, and sector-specific strengths, these markets offer compelling opportunities amid the wreckage of U.S.-China tensions.

Crucial data points reinforce this view:
- Japan’s recovery: The Nikkei’s rebound and Morgan Stanley’s sector-specific inflows signal investor confidence in its trade negotiation leverage.
- India’s ascendancy: A 3% NIFTY rise, coupled with Apple’s production shift and a $47 billion trade surplus, highlight its structural advantages.
- Global growth dynamics: The IMF’s downgraded forecasts underscore the necessity of seeking refuge in resilient markets like Japan and India.

While risks persist—most notably supply-chain bottlenecks and geopolitical uncertainty—the fundamentals are clear. For investors, the tariff shock of 2025 isn’t just a short-term event; it’s a catalyst for a multi-year realignment of global supply chains and capital flows. In this new era, Japan and India are the winners to watch.