Five for '25

One year ago, investors entered 2024 with plenty of big questions. Chief among them were who the next president of the United States would be, when the global rate-cutting cycle would begin, whether US exceptionalism would continue, how China would address its growth challenges, and if massive spending on AI would pay off.

One year later, Donald Trump is readying for his second presidential term, rate cuts are well under way, and US growth continues to lead all developed markets. In response, the S&P 500 is coming off its best two-year performance since 1998, the US dollar is the strongest it’s ever been in the floating-rate era (in trade-weighted terms), and 10-year US yields have climbed for a fourth straight year despite the start of Federal Reserve easing (including 27bps since Trump’s re-election). What’s more uncertain, however, is what Trump 2.0 will bring, whether China’s biggest stimulus package in years will be enough, and what AI’s next phase will look like.

For Asia Pacific, these outcomes beg even tougher questions in the year ahead. To ring in 2025, we address the five most important ones in this special edition of Investing in Asia Pacific.

The most consequential is what Trump 2.0’s tariff priorities mean for Asia. After all, the region is home to America’s biggest strategic rival (China) and an overall (ex-China) trade surplus with the US that’s nearly doubled since the 2018-19 trade war. We believe that tariffs could result in a regional growth hit of up to 1ppt and constrain policy easing, with China and select economies like Vietnam (and its USD 100bn US surplus) among the primary targets. But while most of Asia will be under scrutiny, 2025 will be all about bolstering defenses and preparing for the negotiation table. That means security allies willing to spend more on defense, beneficiaries of “friend-shoring” (as opposed to Chinese export platforms), and domestically oriented economies are better positioned for Trump’s second term.

Second, how will China respond to Trump 2.0? Trump’s tariff intentions could be announced as early as Week One, but Beijing is unlikely to be caught off -guard again this time around. While its counter-tariff strategy could include tighter export controls on critical minerals and components, sanctions, moderate yuan depreciation, and concessions, the most effective response is one focused inward on boosting domestic demand. We think a higher deficit ratio (4%) and a broad annual fiscal package of CNY 2-4tr can help offset the tariff hit and keep growth in the mid-4% range in 2025.

Third, which APAC markets can perform under Trump 2.0? Solid economic growth, rate cuts, and Chinese stimulus supported near double-digit returns for Asia ex-Japan equities in 2024, but they once again significantly lagged the S&P 500’s performance. In 2025, Trump’s return means the macro mix will become even more challenging for APAC markets on balance. But we think further Chinese policy measures, (shallower) rate cuts, and healthy earnings growth (11% in 2025E) despite tariffs should continue to support low teen returns in the year ahead. Pockets of outperformance can be found in markets that are resilient to tariffs (India, select ASEAN) and linked to specific tailwinds like AI (Taiwan).

Fourth, will less Fed easing and a firmer USD weigh on Asia’s rate proxies? A hawkish repricing of Fed easing expectations means just 50bps of rate cuts is now likely in 2025 (vs. 100bps previously). Though tariff, inflation, and growth uncertainties could result in a period of front-loaded strength for US yields and the dollar near term, we still see a moderation later in the year as interest rates gradually move lower amid benign growth conditions. We continue to like Asia investment grade credit, which should see less spread widening than the high yield segment in a downside scenario, and private credit opportunities to capitalize on currently elevated yields. We reiterate a cautious view on Asian currencies for now (particularly those that are export sensitive).

Finally, will AI continue to drive transformational opportunities in Asia? Following two years of remarkable gains, we expect more upward AI capex revisions from big US tech companies to provide a fresh boost for a maturing AI rally. Monetization should also continue to narrow the gap with capex, and underlying earnings growth is set to remain solid. Though growth rates will likely begin to normalize, we still expect mid-teen returns for the industry in 2025. We continue to like AI leaders and semiconductors, including along the Asian supply chain. Our power and resources theme also benefits from structural AI demand, while private markets can provide better access to innovation trends with long-term growth potential.

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