Insights

We have upgraded our near-term economic outlook for the US and anticipate Japan's "virtuous circle" to remain intact. Predicting the timing of any cyclical market downturn remains challenging. However, we also highlight heightened tail risks associated with policy disappointments in the US going into 2025. We continue to see risks as biased towards the inflationary, and we also foresee expansionary US fiscal policy as ultimately unsustainable.

China has been feeling the pressure with Donald Trump due to return for his second term as US president. However, during Trump's first term China actually outperformed the S&P 500 index, which demonstrates the importance of domestic policies over external pressure.

This month we evaluate factors expected to attract attention in 2025 from a Japanese economy and equity market perspective. And as the government compiles another stimulus package, we discuss how Japan could be about to test the Laffer curve theory, which argues that tax cuts can actually increase overall tax revenue.

Asian local government bonds are positioned to perform well in 2025, supported by accommodative central banks amid an environment of benign inflation and moderating growth. We expect Asian corporate and bank credit fundamentals to stay resilient, aside from a few sectors and specific credits which may be impacted by tariff threats or US policy changes.

Many may expect the incoming Trump administration's transactional approach to be detrimental to the geopolitical and macroeconomic landscapes. However, we believe that Washington's mercantilist stance should not prevent Asian markets from offering attractive absolute returns, as was the case during the 2017-2021 period under Trump's first term.

In 2025, US economic growth is expected to continue due to fiscal stimulus, despite above-target inflation. Meanwhile, the strong dollar could face disruptions, the Bank of Japan may keep raising interest rates and China is seen balancing domestic stimulus with potential US tariffs. European growth may recover slowly due to US tariff risks, and global central banks' policies will likely diverge to manage these challenges.

With Japan overcoming deflation and ushering in a period of progress and consolidation despite market volatility and political upheaval, we expect Japanese companies to make strategic decisions in 2025 that attract global investors in larger numbers.

Throughout history, equity investors have benefitted from maintaining a long-term view and an optimistic outlook on humanity's ability to prevail in the face of adversity. This might once again be the case, meaning that the biggest risk might be not having exposure to the highest quality earnings streams through a diversified portfolio of global equities.

We believe that a changing political environment could present opportunities across asset classes in 2025, with fixed income in particular poised to benefit as markets adjust to more realistic inflation expectations.

While 2024 was characterised by broad market gains (or “beta” returns) in Singapore, we expect 2025 to be more centred on generating excess returns (or “alpha”). We believe the service economy, represented by financial services and transportation, will continue to contain key sectors which offer high sustainable returns, positive fundamental change and growth.