Trump Tariffs May Bolster Asian Markets Despite 1% Earnings Decrease

President Donald Trump's proposed tariffs on Asian trading partners may have a less severe impact on regional markets than initially feared. Analysts from Goldman Sachs suggested that while the tariffs are expected to have a lasting impact, they could potentially bolster investor confidence if the policy outlook becomes clearer. The primary concern for investors is market uncertainty rather than the tariffs themselves, as frequent policy changes have significantly impacted market performance.

Trump has informed approximately two dozen countries that new levies on their goods will commence on August 1 unless new trade agreements are reached. The impact of these tariffs may vary across regions and sectors. North Asian markets, such as South Korea and Japan, face the highest revenue exposure to the US within Asian equity markets. In contrast, Southeast Asian markets and domestically focused sectors such as utilities, banks, telecoms, and real estate are less exposed.

Despite potential risks, regional earnings might decrease by 1% for every 5 percentage-point rise in tariffs. However, the Federal Reserve's easing cycle and a weaker dollar could partially mitigate the damage by driving investors toward higher-yielding Asian assets. A weaker dollar could also benefit Asian firms reliant on dollar-denominated borrowing, indirectly supporting growth.

Asian markets experienced a sharp sell-off following Trump's initial tariff announcement, but they have mostly recovered. Japan's benchmark index is up about 1% year-to-date, while the Hang Seng Index has surged by 25%, aided by a boost from China's AI-driven initiatives.

The analysts note that the growth impact may not be as detrimental as markets anticipated in early Q2, and actual tariff announcements might serve as a risk-positive clearing event, despite rates being above baseline expectations. The proposed tariffs are part of a broader strategy by the Trump administration to rewire the global economy. The US has already implemented tariffs on steel and other goods, and the new levies are expected to target a wide range of products. However, the actual impact of these tariffs remains to be seen, as the administration continues to negotiate with its trading partners.