Is China+1 still a theme?

Investing.com -- ASEAN nations are poised to remain among the largest beneficiaries of supply chain diversification away from China, according to Macquarie.

The firm said in a note to clients that “similar tariff rates on U.S. exports level the playing field on exports” and that foreign direct investment (FDI) will be an important driver as supply chains continue to adjust.

“We believe ASEAN countries remain amongst the biggest beneficiaries of capacity relocation from China,” analysts wrote, noting opportunities in “bottom-up ideas across the region levered to improved domestic macro and capex cycle beneficiaries.”

Macquarie said the “China+1” strategy, where companies maintain their operations in China while diversifying their manufacturing and supply chains by establishing a presence in at least one other Asian country, is far from fading.

“FDI to GDP across ASEAN-6 in 2021-24 averaged 7.0% of GDP, and we expect a further up-tick in the medium term to 7.5%,” the note said.

Excluding Singapore, inflows into emerging-market ASEAN over the same period were 3.7% of GDP, about double the global EM average.

The firm’s recent consumer tour in China indicated that “Chinese manufacturing companies are continuing to relocate to ASEAN markets.”

Macquarie’s analysis shows a 20% average labor cost advantage in ASEAN compared with China, after adjusting for productivity and foreign-exchange differences.

“Capacity relocation and investment are far preferable to merchandise dumping,” the analysts said.

They added that with the removal of tariffs and non-trade barriers with the United States, ASEAN countries will need to “balance carefully their China trade partnerships.”

Macquarie expects this shift to support a new investment cycle in the region, driven by both global supply chain realignments and improving domestic economic conditions.