By Craig Mellow

Stocks around the world remain hammered by Donald Trump's April 2 tariff onslaught, despite the relief rally that followed his 90-day pause announcement a week later. Investors are looking to two, perhaps surprising, emerging markets for potential bargains: Mexico and China. Yes, China.

India, the No. 2 emerging market, remains relatively above the tariff fray: a domestically driven economy whose highest-margin exports to the U.S. are non-tariffed software services. Stocks there have all but recovered from Trump's "Liberation Day" shock.

Mexican shares are still down 6% (about the same as the S&P 500). China's Hong Kong-traded index has sunk 10%. Those could be dips worth buying on.

The shifting announcements and complex formulas around Mexico obscure the fact that Trump has walked back most of his trade threats for now. Finished vehicles exported to the U.S. -- $87 billion worth last year -- are subject to a 25% tariff, but with a pro rata deduction for U.S.-produced components, notes Oscar Ocampo, economic development director at the Mexican Institute for Competitiveness.

Auto parts, a still bigger category at $100 billion, will continue to flow tariff-free. "They are well aware that tariffing parts would be killing Detroit," Ocampo says.

Mexico's special nearshoring relationship with the U.S. increasingly looks like it will survive the current turmoil. "In relative terms, our highest conviction remains with Mexico," says Arthur Budaghyan, chief emerging markets strategist at BCA Research.

The chances for U.S.-China trade peace look slimmer. "China will simply not start negotiating at Trump's tariff level," Budaghyan predicts. "They see this as a war, not just a trade war."

Washington, and investors, may be overestimating the No. 2 economy's vulnerability, however. China's dependence on exports to the U.S. has been shrinking for a decade, to less than 3% of gross domestic product. Many of its leading exporters are multinational companies, like Apple or Tesla, while the biggest Chinese stocks -- Tencent Holdings, Alibaba Group Holding, Meituan -- are domestically focused, notes Justin Thomson, head of international equity at T. Rowe Price. "The impact of trade on the China index is relatively small," he says.

Chinese leader Xi Jinping has levers he can pull to rev up domestic consumption. "Chinese consumers are sitting on $10 trillion in savings, which in the past would have gone into flipping properties," says Alex Smith, head of equities investment specialists at Aberdeen. "That's possibly China's secret weapon."

Beijing also has room for more direct fiscal and monetary stimulus, adds Guilherme Valle, a founding partner at asset manager ABS. "They were holding back because of the threat from Trump and tariffs," he says. "This is the moment they have been waiting for."

China can offset some lost U.S. exports by increasing share elsewhere. Trump's attack gives the authorities an excuse to let the yuan devalue as much as 10% without stirring popular discontent, Budaghyan thinks. Chinese electric vehicles and home appliances are leading a "move up the value curve "in (ex-U.S.) world markets, Aberdeen's Smith adds.

With Chinese stocks still down by half from their 2021 peak, valuations look attractive, too. EV champion BYD trades at 18 times earnings versus 83 for Tesla, Smith observes.

Trump's campaign to revamp U.S. trade is hardly over. At least investors don't think it is, to judge by renewed selling after the April 9 rally.

Two trading partners look to be on more solid ground than most, for opposite reasons.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 10, 2025 13:16 ET (17:16 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.