US markets have topped; in medium term, it is good for EMs like China, Mexico: Adrian Mowat

Adrian Mowat, EM-Equity Strategist, says he believes the US markets have topped out and they are going to struggle to make much progress this year. It is a good thing in the medium term, but we obviously have to deal with a lot of news flow around the US trade policy, around events in Russia and Ukraine. So the US generates volatility, but in the medium term, it is probably going to be good for Asia and emerging markets but you need to be selective about those. It is ironic that the parts of EM that are doing well are China and Mexico.

Do you think that the US market is now topping out given that the economic outlook is not that great?
Adrian Mowat: I guess I do. And there is very good evidence of that, particularly in the magnificent seven (MAG-7) stocks. Perhaps financials have got a bit more resilience in the US. But if we think about the US story, we have got an expensive market. Much of the last 24 months has been talking about US exceptionalism. The US economy is growing much faster than the rest of the OECD and many EMs. The policy that the current administration has put in place is going to be damaging for growth and the evidence of that is coming through in both consumer and corporate sentiment.

I particularly note how small businesses' confidence has fallen sharply. Tariffs will slow growth, drive up inflation, which then traps the Federal Reserve in not being able to cut rates as the economy slows. We have also got a story around the dollar. The dollar has been extremely strong in the last couple of years. The dollar strength has come to an end as well. I do believe the US markets have topped out and they are going to really struggle to make much progress this year. Now, is that a good or a bad thing for our markets?

It is actually a good thing medium term, but we obviously have to deal with a lot of news flow around the US trade policy, around events in Russia and Ukraine, and so the US generates volatility, but medium term is probably going to be good for Asia and emerging markets but you need to be selective about those.

Also give us a sense on how do you see the fund flow moving into the emerging markets because of late we have seen some concerns related to the surge in the dollar index that was impacting the flows in the emerging market and, the US markets were definitely sucking out the liquidity. But now that the US markets outlook is not turning that bullish and there is a lot of uncertainty regarding the tariffs and the implications, is now the time to look at select pockets in the emerging markets?
Adrian Mowat: Absolutely and there is quite a lot of pressure on global funds. To be a successful global fund in the last couple of years, you basically wanted to be a US fund with some token global exposure. Now you have got both Europe and certain parts of EM doing well. But when you analyse that, it is ironic that the parts of EM that are doing well are China and Mexico. These countries both have relatively domestic equity markets and so the logic behind what is going on there is that there will be more support for the domestic economy to offset some of the negative impacts on the external sector.

So, the market composition is very important. Also, China has got the benefit of the AI story and this whole technology that DeepSeek has come up with is very significant. A lot of power is going to be used in data centres. If you follow the model that you have with ChatGPT, the model that Nvidia’s processors enable, it is really very difficult to put that in place in an economic way because you burn too much electricity and use too many expensive processors.

DeepSeek's technology looks like a game changer. You have also had other technology stories out of China this week; BYD is talking about their latest vehicle just taking five minutes to charge and so, what we have got is a tech story in China plus a bit of domestic demand and that is waking up global investors. I am noticing a few global funds that I follow beginning to add back some China stocks. It comes back to this selective story in EM.

Maybe there is a story in Mexico and maybe at the moment there is a story in China. Elsewhere in emerging Asia, if we look at the big markets, Korea and Taiwan are really too correlated to Nasdaq to do well and in the ASEAN region, there really is a lack of catalysts. If anything, there is some sort of negative policy in Indonesia. The story for India is a little bit more complicated. Obviously, the market has sold off. It has sold off because people were disappointed with the level of revenue and EPS growth that was being delivered in an expensive market.

There is perhaps less confidence in the growth story in India. But valuations have adjusted down. I would note that at the index level, after failing to break through some of the shorter-term moving averages, we are around the 50-day moving average. Let us see if the market can break above that and hold. But at the moment, my focus in EM is very narrow. It tends to be very much a China focus because that is where we have got the growth story. I would note that one of the biggest stocks in the MSCI China index, Tencent, came out with numbers that were ahead of expectation and good forward guidance. We are seeing a little bit of profit taking today. But if you have got momentum, relatively inexpensive valuations, and positive earnings, that is a good story for equities.

I get it. A lot of Indian retail as well as bigger participants as well have been deploying money into China and not now, since last year. But the problem is that it is still being looked at as very much a tactical play. Has China, with all the news around AI, become a structural story?
Adrian Mowat: One of the problems with the Chinese market is it is pretty volatile. So, to some extent, one needs to be reasonably nimble. But yes, there is a much more attractive structural story here. So, we have got a story where the index composition is quite heavy as it is in the United States in terms of your tech AI play and China is coming out with some very interesting technology and you can play that in very largecap liquid names. That is a structurally interesting story I want to participate in.