Asian stock investors are beginning 2025 with cautious optimism, as concerns about Donald Trump’s commitment to increasing tariffs and the potential strengthening of the U.S. dollar loom over regional markets. A survey of 15 strategists and fund managers conducted in late December reveals that most foresee Asian equities lagging behind their U.S. counterparts at least through the first quarter of the year.
The key drivers of this pessimism stem from Trump’s “America First” policies, which many believe will support growth and inflation in the U.S. economy, bolster the dollar, and limit the potential for central banks to reduce interest rates. These factors collectively create an uncertain environment for Asian markets, which are also grappling with the pressure of higher tariffs.
In 2024, the MSCI Asia Pacific Index rose by approximately 7%, a stark contrast to the 23% gain of the S&P 500 Index, which was propelled by a global artificial intelligence boom benefiting U.S. mega-cap stocks. Despite Asia’s relatively low valuations compared to the U.S., investors are not optimistic about a near-term recovery. Societe Generale SA anticipates a “bearish time” in the first quarter, while Maybank Securities Pte warns that weaker local currencies will hinder equity inflows into the region.
Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan, emphasized the uncertainty facing Asian equities due to new policies from the Trump administration. “I don’t expect valuations to improve much in the first quarter,” Kinoshita said, predicting that the MSCI Asia Pacific Index could end March just 2% higher than its December 2024 closing.
While the broader outlook for Asia remains grim, about half of the surveyed experts expressed optimism regarding China’s prospects, citing the government’s stimulus efforts. Despite the region’s overall downbeat forecast, many believe that most negative factors have already been priced in. China’s CSI 300 Index rose nearly 15% in 2024, marking its first annual gain since 2020, largely driven by stimulus measures introduced by Beijing in the final quarter of the year.
Investors are increasingly bullish on Chinese equities, with Xin-Yao Ng, an investment director at abrdn Plc, suggesting that the government’s ongoing commitment to boosting the domestic economy could provide upside potential. Ng recommended buying quality consumer stocks, particularly given the prospect of less severe U.S. tariffs if President Trump and Chinese President Xi Jinping reach a trade agreement.
Meanwhile, Japan continues to attract investor interest, with about a third of respondents predicting that the country will outperform its regional peers. The Topix Index surged nearly 18% in 2024, and analysts point to strong corporate earnings growth and “structural improvements” in Japan’s economy as key reasons behind the positive outlook. Jack Siu, head of discretionary portfolio management for Asia at Lombard Odier, emphasized that Japan’s central bank is likely to pursue a gradual rate-hike path, further enhancing the appeal of Japanese equities.
The greatest threat to Asian markets in the first quarter, however, remains the potential for higher U.S. tariffs, identified by nearly 70% of those surveyed as the primary risk. Other concerns include geopolitical tensions and the possibility that China’s stimulus measures may fall short of expectations.
For investors navigating this uncertain environment, Manulife Investment Management recommends focusing on companies with strong cash flows and robust balance sheets, as they are better equipped to weather prolonged higher interest rates and adapt to the changing tariff landscape.
RBC Wealth Management Asia echoed a cautious approach, urging investors to refrain from hastily increasing their exposure to Asian equities. “We would prefer more clarity on tariffs before adding more allocations to Asia equity,” said Jasmine Duan, senior investment strategist at RBC. “Tariffs are the largest overhang for Asian equities at the moment. And tariffs are typically lose-lose.”
As the first quarter unfolds, Asian investors will continue to monitor developments surrounding U.S. trade policies and the broader economic landscape, hoping for signs of stability amid a challenging start to 2025.
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