Year of the Snake offers active investment openings in Asia amid policy shifts
Uncertainty surrounding the policies from the incoming Trump administration and the sequence of their implementation add significant layers of unpredictability
THE last few months of 2024 have proven that volatility will remain heightened as we step into 2025. While we expect global growth to plod along in the first half of next year, the second half could be largely influenced by developments in the US and China.
The uncertainty surrounding the policies from the incoming Trump administration and the sequence of their implementation add significant layers of unpredictability to the outlook. All eyes will also be on further stimulus measures from China – targeted and effective measures that lift consumer confidence and spending would be viewed positively.
Notwithstanding these factors, the “consensus” focus on the potential negative impact of tariffs between the US and other economies may run the risk of distorting the underlying picture of both trade and the domestic focus of a good proportion of stocks and bonds within Asia.
Asia is the world’s second most integrated trade region after the European Union, with nearly 57 per cent of its trade value originating within the region – an increase of 3 per cent over the past 20 years, in contrast to declines observed in other regions.
Trade between Asean and China grew by 8.1 per cent in early 2024, and bilateral economic relations are expected to remain robust with the signing of several agreements, including the Regional Comprehensive Economic Partnership and the Asean-China Free Trade Agreement 3.0.
Yet, many stocks across Asian markets in the consumer discretionary, finance and industrials sectors – which derive nearly all their revenues and earnings from their domestic economies – are being penalised by a “risk-off trade” towards Asia.
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Pockets within Asia are poised to benefit from longer-term secular and economic growth trends. Longer-term growth drivers such as increased capital expenditure, decarbonisation and supply-chain diversification can lead to higher earnings in these markets. Ongoing corporate reforms are expected to continue strengthening balance sheets in Asia, especially in Japan.
Amid a more volatile global economic backdrop, investors will need to be smarter about how they diversify and manage risks. There is merit in being nimble and seeking diversified sources of alpha. Picking the right entry points and selecting stocks with visible earnings growth drivers, in addition to assessment of the fundamentals, will be key in portfolio construction.
Embracing Asia’s giants
China, India and Japan are some of the world’s most dynamic and influential economies. The three giants account for more than 60 per cent of the MSCI AC Asia-Pacific Index; each is unique and merits standalone allocation in investor portfolios.
In China, the government’s recent debt-swap initiative aims to repair balance sheets and is expected to improve the municipalities’ ability to increase spending to stimulate domestic consumption. This will benefit companies that provide goods and services to government agencies such as telecommunications, infrastructure construction and waste treatment companies and consumer companies.
Ongoing reforms, rising urbanisation and supply-chain shifts in India will continue to support the nation’s economic and earnings growth over the longer term. Large-cap counters in the financials, telecommunication and healthcare sectors in India are attractively priced, relative to their smaller-cap peers.
As for Japan, the equity market rally may broaden out in 2025, providing greater opportunities for mid- to small-cap stocks, which are poised to benefit from increased consumption and ongoing corporate reforms.
Asean, the front-runners for China plus one strategy
New political leaders took office across many Asean countries in 2024, and these election outcomes have reshaped regional dynamics and domestic priorities.
Stimulus measures introduced are expected to supercharge the economy and encourage discretionary spending. We see attractive opportunities in banking, construction and building materials and consumer sectors in Malaysia; in consumer staples and financials companies in Indonesia; and in financial, consumer discretionary and information technology stocks in Vietnam.
Hospitality, retail and airline stocks in Thailand should benefit from increasing disposable income and a recovery in tourism, while the focus on digital infrastructure will favour companies in the renewable energy and technology sectors.
Asian currency bonds could offer attractive yields
The US Treasury yields remain well-supported on expectations that a Republican-controlled government will enable President-elect Donald Trump to increase government spending, impose tariffs and enact stricter immigration controls, which would be inflationary. His policy changes can materially influence the economy, alter the US fiscal trajectory and reshape the Federal Reserve’s policy outlook.
The US dollar continues to strengthen post-election, underpinned by expectations of a less aggressive Fed easing cycle and potential US economic outperformance driven by Trump’s campaign promises.
As credit spreads are at historical tights, investors are not adequately compensated to scale down the credit curve, especially since we are approaching the end of the current economic cycle. Therefore, we prefer staying in higher-quality bonds. We also see opportunities to rotate investments across local and hard currency debt within the emerging-market universe.
Asian currency bonds fully hedged to US dollar could also offer higher yields due to meaningful carry advantage from a cross-currency basis.
Riding the artificial intelligence wave in Asia
Generative AI technologies have the potential to transform or disrupt industries and have profound implications on productivity, growth and profitability.
Investors have responded to the AI potential with great enthusiasm, as seen from the performance of the Magnificent 7 in 2024. Asia offers investors exposure to the AI theme.
Taiwan and South Korea have established industrial supply chains supporting the development of high-end semiconductor chips and components to enable data processing and analysis. Advanced packaging and testing companies in Malaysia are also beneficiaries of this data revolution wave.
Generative AI can be used in fields such as content creation for games, movies, music, virtual reality and augmented reality. It can also enhance advertisers’ ability to find and target audiences by enabling precise audience segmentation, real-time personalisation of ads, and optimised ad placements. We have observed use cases in which AI has reshaped industries such as manufacturing, transport, healthcare, retail and education. These new application areas will create additional demand for improved memory chips, which will benefit the enablers in Asia – semiconductor players, gaming companies, electric vehicle manufacturers, e-commerce players and cloud providers.
The writer is Chief Investment Officer at Eastspring Investments
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