Although we are positive on US equities over a 12-month period, we believe it could experience a period of near-term consolidation as investors confront increasing uncertainties relating to inflation, US tariffs and the White House’s cost cutting efforts.

Eli Lee
Managing Director,
Chief Investment Strategist,
Chief Investment Office,
Bank of Singapore Limited

Some catchup trades have had a strong start to the year, such as European equities. However, this was not an across-the-board rotation into cheaper laggards.

European equities enjoyed a similar bright spell in 1Q24 and were subsequently rangebound for the rest of the year.

Investors should keep an eye on whether US exceptionalism can hold up, especially with tariff developments, China stimulus and direction of bond yields, in addition to the Magnificent Seven outlook.

In essence, for the broadening rotation, one needs a weaker US Dollar (USD), a benign tariff backdrop, China acceleration, well-behaved bond yields and waning Magnificent Seven leadership.

As we have cautioned previously, a near-term pullback in Technology stocks appears plausible but it is premature to believe that tariff uncertainty will peak soon.

Although we have a Neutral position in European equities as there remains much uncertainty, there are still attractively valued stocks for the investor from a bottom-up basis.

Meantime, investors are increasingly recognising China’s innovation capabilities and the strength of its high-tech, value-added industries. A renewed focus on US-China geopolitical tensions could cap optimism in the near term, but over the longer term, we believe the rally is broadly durable and has more legs.

US – Consolidating but longer-term tailwinds intact

After rallying over 20% annually in the last two years, the US equity market is entering a period of consolidation as investors confront increasing uncertainties relating to inflation risks, US tariffs, the interest rate path and fiscal cost cutting.

With valuations baking in abundant optimism over the US earnings outlook and President Donald Trump’s policies, the US market is vulnerable to short-term corrections driven by negative surprises in growth and inflation. This was demonstrated in February as signs of economic weakness emerged e.g. services PMI fell below 50 for the first time since January 2023 to 49.7, and inflation expectations for the coming year rose to their highest level since May 2023.

That said, we remain convicted that the long-term US equity bull market remains well and alive given longer-term tailwinds, such as President Trump’s pro-growth policies, ample system liquidity, rising productivity and artificial intelligence (AI) innovation. Notably, most S&P 500 Index companies that reported 4Q2024 earnings beat estimates, thereby reflecting sound corporate fundamentals.

On balance, we believe what lies ahead is more likely to be a period of consolidation rather than a major market top.

Europe –Look forward to peace in Ukraine but monitor developments on the tariff front

European equities have outperformed other regions year-to-date (YTD), with a potential end to the Russia-Ukraine war improving sentiments. German equities have boosted Europe’s performance, with much of the former’s outperformance coming from large index weightings to global firms like SAP and Siemens. German equity markets are also heavily weighted to particular sectors such as Technology, Financial Services, and Industrials. Defence names such as Rheinmetall have also led the charge due to expectations of more defence spending in the future. On the other hand, uncertainties remain, including the question of how much Russian gas would return to Europe to aid competitiveness, the level of fiscal spending ahead, as well as potential tariff impacts from the US.

We favour defence names with the possibility of EU funds being either redirected or raised to add to defence spend. Sectors such as Healthcare also tend to swing less with trade uncertainty, and European firms with US-based businesses may be less impacted by US tariffs.

Japan – Tariff concerns and stronger Yen causing a drag

The MSCI Japan Index suffered a dip in February (in Yen terms) after coming in flat in January. We believe the weakness was caused by concerns over potential tariffs from the Trump administration and a stronger Yen. This was despite the robust earnings season. The MSCI Japan Index has approximately 21% revenue exposure to the US, comprising 18% from goods and 3% from services. A 10% US universal tariff could potentially hit earnings by close to mid-single digit levels. Furthermore, tariffs would also have a negative bearing on corporate earnings through its impact on GDP.

Asia ex-Japan – Government initiatives to drive growth ahead

The MSCI Asia ex-Japan Index recorded another positive increase in February after appreciating 0.6% in January. This was driven largely by the MSCI indices of China, Korea and Hong Kong, but partially offset by weakness from Thailand, Indonesia and India. Indonesia’s President Prabowo Subianto announced the launch of Danantara on 24 February, which is the country’s new sovereign wealth fund. Danantara will manage approximately US$900 billion of assets and seven state-owned enterprises (SOE) will come under its control. We believe there were market concerns over transparency and governance issues. As such, execution and accountability will be key. The way dividend payments from the SOE companies are increased to boost Danantara’s revenue will also be closely scrutinised.

Singapore’s Budget 2025 focused on key areas such as tackling cost pressures, advancing Singapore’s growth frontiers and building a sustainable city. We expect consumption vouchers to boost the retail sector, and we reiterate our constructive stance on the Singapore market given its defensive characteristics, attractive dividend profile, and undemanding valuations. Tax incentives and other measures such as the launch of a S$5 billion Equity Market Development Programme to rejuvenate Singapore’s capital market are also seen as positives.

China/HK – Expecting more clarity on supportive policies

Hong Kong and offshore Chinese equities have outperformed the region and rose 14-15% in the past month on the back of AI optimism as Communication Services, Consumer Discretionary and Technology sectors led the performance. We remain constructive on Chinese equities and expect the onshore A-share market to play catch up as it is more sensitive to supportive policies announced at the National People’s Congress (NPC). Also, it has larger exposure to industrials and IT sectors, which can also benefit from the AI supply chain and advanced manufacturing.

While we reckon the broadening of the AI theme could have more room to go given enhancements in productivity and earnings, the potential escalation of US-China tensions remains on the horizon with the latest America First Investment Policy Memorandum. We expect the Chinese equities market to consolidate in the near term in light of profit taking and risk management.

Key points to focus on include: i) the NPC where more clarity on supportive fiscal policies could be unveiled; ii) earnings season to gauge potential re-rating opportunities; iii) high frequency data to demonstrate ongoing improvement in the real estate market and increased business and household confidence; and iv) any update on a potential meeting between top leaders in US and China.

Global Sectors - Feverish February after a jam-packed January

It has only been two months since the start of 2025, yet it feels as if we have already navigated through several pivotal months, as investors in February grappled with a fresh wave of tariff announcements and the accompanying uncertainty, the potential resolution of the Russia-Ukraine conflict, and a renewed focus on China’s technological advancements and innovation, amidst a backdrop of other significant developments. The Healthcare sector has emerged as the outperformer year-to-date, followed by Financials, as at the time of writing.

DeepSeek sparking different reactions for Technology

In the latest reporting season, it has been clear that DeepSeek-related concerns about an AI CAPEX cliff is not materialising, at least in the near term. Several hyperscalers have articulated robust CAPEX plans, with some executives seeing such heavy investments as a strategic advantage over time. We continue to believe that as large language models (LLM) become more efficient, the resultant proliferation of use cases will result in more AI spending, rather than less. Conversely, the development of DeepSeek has sparked a sharp rally in Chinese Technology stocks.

A combination of depressed valuations, notable AI model developments and elevated CAPEX levels have led to a swift re-rating in the Technology complex. We continue to remain constructive on internet and platform plays in China given promising AI monetisation opportunities as well as potential tailwinds from any further consumption support measures, especially for e-commerce players.

Thriving segments: Chinese innovation, European defence and the broader Healthcare sector

Aside from Chinese Technology stocks, defence related names in Europe have appreciated meaningfully as well, and we continue to favour this segment as governments are expected to allocate more of their budgets towards defence. On the other hand, concerns relating to budget cuts by the Department of Government Efficiency in the US have weighed on US defence names, and value has also emerged for certain prime contractors. Meanwhile, the Healthcare sector is seeing greater investor interest as: i) an earlier period of underperformance had resulted in more attractive valuations; ii) its relative defensiveness is appealing during times of uncertainty; and iii) the sector remains at the forefront of innovation and stands to gain substantial benefits from the widespread adoption of AI with lower costs.