More US activity indicators are softening and there could be further declines as more aggressive trade, immigration and fiscal consolidation policies increase uncertainty, and affect the labour market. Ultimately, this could lead to stronger US Federal Reserve (Fed) support. Europe and China’s more supportive fiscal stance would provide support to equities in these regions, but trade uncertainty is a major drag, as tariff uncertainty has not yet peaked. Due to US tariffs, we see equities entering a highly volatile phase over the next few months given heightened growth and inflation fears.

In line with our lowered growth and corporate earnings forecasts, we could see some short-term downside, but we remain constructive over a 12-month horizon. As such, we maintain our Overweight positions in US and Asia ex-Japan equities, with Neutral positions in Europe and Japan. We favour: i) value and quality stocks with pricing power and limited exposure to tariffs, ii) beneficiaries of the structural artificial intelligence (AI) theme with revenue upside from growing adoption, and iii) the Technology, Healthcare and Consumer Staples sectors.

US – Keeping Trump’s pro-growth stance in mind amid front-loaded negative surprises

US equities continued to consolidate into early April on weaker sentiments and negative tariff surprises. In particular, the 2 April announcements, if fully enacted after the 90-day pause, could raise US effective tariff rates to the highest in over a century. We see increasing pressure on US corporate earnings for 2025, in line with our recent US GDP forecast downgrade. Improved growth narratives in China and Europe also likely contributed to a rotation out of the US.

However, barring a recessionary scenario, we remain constructive on US equities on balance. While investors are focused on the impact of a higher tariff regime, we expect Trump’s pro-growth policies (e.g. deregulation and tax cuts) to feature more prominent subsequently in his term, especially with the midterm elections in 2026. Meanwhile, the prevailing weakness and mixed outlook for the US Dollar should also help to partially cushion some of the negative earnings revisions moving forward. Over the medium to longer term, rapid AI developments could also lead to investments and productivity gains.

We think the recent selloff could present attractive buying opportunities. That said, we would closely watch tariff negotiations ahead with cautious optimism.

Europe – Opportunities from structural tailwinds but not unscathed from tariff shocks

The EU has approved tariffs on EUR21b of US goods in retaliation for the 25% duties US President Trump imposed last month on the bloc’s steel and aluminium exports. While an escalating trade war presents downside risks, Europe has also announced stronger fiscal and defence spending. A potential end to the Russia-Ukraine war that results in lower energy prices and higher consumer confidence would also lend support.

The turning of the fiscal tide shows that Europe is taking pro-active steps in securing its defence. Germany is also moving ahead with a EUR500b infrastructure fund to be spent over the next decade. There are structural shifts taking place which lend support to our constructive longer-term view for names in (i) the Defence sector as well as; (ii) capital goods, chemicals, construction and materials names that may benefit from higher infrastructure spending and rebuilding efforts in Ukraine eventually. While investments in decarbonisation may face challenges due to the shift in focus to defence, the energy transition continues to be a critical priority for the region, and we continue to see investment opportunities in this segment.

Japan – Focus on domestic oriented names

We maintain our Neutral position on Japanese equities amid significant market volatility. The reciprocal tariffs imposed on Japan by the Trump administration will have a direct impact on Japan’s economy, while there could also be negative spillover effects to exporters from a slowdown in global economic growth. The weaker GDP growth ahead could also push back the Bank of Japan’s (BoJ) rate hikes, which would in turn dampen Japanese banks’ net interest margins (NIM) and their return on equity (ROE) outlook. On the other hand, domestic oriented sectors/companies would be relatively more resilient assuming a no recession scenario. Results from the first round of Shunto wage negotiations pointed to an agreed average increase in base wages by 3.8%. This, coupled with tariff concerns, continued robust inbound travel and our house view for an appreciation in the Yen, would support domestic oriented sectors and companies. From a medium to longer term perspective, investors can consider companies exposed to industrial automation and robotics. This would be a structural trend in overcoming Japan’s aging demographics and a play on China’s cyclical recovery, although the latter would depend on additional policy support.

Asia ex-Japan – Taking a more cautious stance on the equity markets of South Korea, India and Indonesia

We maintain our Overweight position on the MSCI Asia ex-Japan Index but make three rating changes within the region. First, we downgrade South Korean equities from Neutral to Underweight, as we believe its year-to-date (YTD) outperformance is unwarranted, with risks of a pullback. South Korea’s ban on short selling was fully lifted on 31 March, and we see the possibility of an increase in short selling activities in the near term. South Korea’s macroeconomic outlook is also subdued, with downside risks to consensus’ earnings forecasts given the MSCI Korea Index’s relatively high sales exposure to the US.

Second, we downgrade Indian equities to Neutral. The MSCI India Index’s robust earnings growth trajectory has come under pressure in recent weeks with downgrades by the street. Foreign institutional investors have continued to net sell Indian equities, while domestic flows, which have been a strong support for market performance, are now showing signs of reversal. Third, our rating on Indonesian equities is downgraded to Neutral. Uncertainties have risen significantly, and there are increasing concerns over fiscal sustainability, off-balance sheet liabilities (through Danantara) and governance. We expect the overhang to remain, and there is potential for further foreign outflows amidst these uncertainties, including US trade policy.

China/HK – Higher volatility amid tariff disputes

With the announcement of high tariffs on China post “Liberation Day” by the US, attention has refocused on US-China tensions. The MSCI China Index has less than 4% revenue exposure to the US and the first-order direct impact would be limited. However, the indirect impact could be more notable, including a slowdown in China’s exports and global trade amid US broad-based tariffs, potential slowdown in China’s economic growth and currency devaluation etc. The broader and higher tariffs on Asian countries are likely to make it more challenging for China to further re-align supply chain to mitigate US tariff impact. Export-focused industries and those with higher US revenue exposure will be more vulnerable. As we expect negotiations will be lengthy and circuitous, Hong Kong and China equity markets are likely to be clouded by external risks associated with the escalation of tariff disputes and US-China tensions in 2Q25. This is likely to cap further valuation re-rating in the near term despite early signs of earnings improvements in the latest results announcement season. We reiterate a barbell strategy focusing on quality yield stocks especially during the periods of tariff disputes and rotate to growth and high beta stocks during periods of trade truce and when deals are settled. We prefer: i) quality yield stocks to cushion market volatility, ii) internet and platform companies, and iii) policy beneficiaries, such as those that could benefit from stronger emphasis on domestic consumption and technology innovation.

Global Sectors - Defensives to outperform cyclicals; prefer value and quality

The Energy sector has had a good start to 2025, with total returns of 9% as at end-March that outperformed other sectors. In general, this strength has been led by more defensive pockets of the sector (e.g. integrated, midstream and large-cap producers), but sentiment in the sector quickly turned sour post “Liberation Day” and a larger-than-expected supply increase from OPEC+. We expect defensive sectors to continue outperforming cyclical sectors ahead, and favour value and quality stocks given the uncertainties related to tariffs and global growth.

Dealing with multiple headwinds in Technology

The US Technology sector has seen a sharp pullback due to a variety of concerns. Tariffs and macro uncertainties are starting to impact company guidance, while Department of Government Efficiency (DOGE) related developments are also causing concern over tech firms with outsized exposure to the federal government. While investors agree that AI will remain an enduring trend, there remains considerable debate over the level of CAPEX needed in this part of the cycle, and whether the ongoing AI hardware buildout is sustainable. We believe that the proliferation of reasoning models and user cases will still require elevated levels of CAPEX, and that macro-related concerns present an opportunity to accumulate quality names with pricing power and strong balance sheets that benefit from ongoing secular trends. We continue to see a host of opportunities for the application of AI in China and believe that potential consumption support by the government could help platform names re-rate further from current levels.

Neutralising the Consumer Discretionary sector

We downgrade the Consumer Discretionary sector to Neutral as recent data shows that US consumer confidence is weakening with households worried about the impact of trade policies and tariffs. Consumers may be less willing to spend on non-essential items, especially if some of the cost increases are passed onto consumers, and we are particularly cautious on the autos industry in the Consumer Discretionary sector. On 26 March, US President Trump unveiled 25% tariffs on autos not made in the US, effective in early April. We expect sentiment on a number of global automakers (less so for the Chinese electric vehicle makers) to be weighed by this development. We continue to maintain our Overweight ratings for the Consumer Staples, Healthcare, IT and Communication Services sectors.