While 2024 was a great year for bull calls, 2025 will be less straightforward. We remain constructive on equities but believe the bull market will enter a more volatile phase.

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

While 2024 was a great year for bull calls, 2025 will be less straightforward. We remain constructive on equities but believe the bull market will enter a more volatile phase.

Although there are longer-term and larger tailwinds for US equities, increased inflation risks along with tariff-induced uncertainties will pose near-term headwinds.

Given these risks, equities could enter a corrective phase in 1H25, but we expect them to experience an eventual recovery by the end of 2025. We maintain our Overweight position on US equities as long term and larger tailwinds – such as certain pro-growth policies, ample system liquidity, rising productivity and artificial intelligence (AI) innovation – will support the equity upcycle.

On the other hand, central banks outside the US may find it harder to cut rates to defend growth due to concerns of excessive currency weakness in the face of a more hawkish Federal Reserve (Fed).

That said, sound fundamentals, positive structural trends, and undemanding valuations drive pockets of opportunity in Asia ex-Japan where we have an Overweight position as well.

As for Europe and Japan, we maintain our Neutral positions as they contend with specific idiosyncratic issues, such as political uncertainties, competitive strategies and currency volatility.

US – Off to a volatile start

Given the volatility that we have seen thus far, we believe that the markets could see a consolidation phase in 1H25 as they digest the risks of higher long-dated US Treasury (UST) yields and a less dovish than anticipated Fed path.

More recently, the developments surrounding DeepSeek have also ignited significant market concerns, as investors have started to question if we are seeing the beginning of the end for the AI-boom.

Notwithstanding these concerns, our base case is that the broader uptrend remains intact. The ongoing reporting season reflects the generally healthy corporate fundamentals, with earnings beating estimates by mid-single digit percentages in aggregate (at time of writing). Consumption remains robust, as evidenced from the strong scorecards from payment network companies and travel players.

With the ongoing trade uncertainties, we believe pronounced and prolonged tariffs could present downside risks to S&P 500 Index’s earnings per share (EPS) estimates and valuation multiples. However, Trump’s domestic agenda may support corporate growth, coupled with robust incoming macro data and still-solid corporate fundamentals.

Europe – Rise in valuation key to outperformance

The discount which European stocks trade versus the US has grown over the years. Barring a correction in US stocks, a reduction in policy uncertainty is needed for the gap to close, in our view, given that moves in the price-to-earnings (P/E) ratio are correlated to policy uncertainty. This could come in many forms, such as more policy support (monetary and fiscal) and/or a peaceful resolution to the war in Ukraine. It is notable that the large divergence between US and European policy uncertainty coincided with Russia’s invasion of Ukraine and a rise in energy prices. Softer inflation outcomes and a lower rate path may also support multiples, or lower-than-expected tariff risks. European stocks with Chinese exposure would also be supported under greater-than-expected stimulus moves from China. However, we would adopt a more selective approach within Europe. Given the strong US Dollar (USD) and relatively stronger growth expected from the US under Trump’s pro-growth policies, European firms with high US exposure which are not exporters (i.e. own US-based businesses) are well-positioned to take advantage of both the stronger USD and US growth. We also favour defence names with the possibility of EU funds being either redirected or raised to add to defence spend.

Japan – Higher policy rate as expected

The MSCI Japan Index started 2025 on a slightly soft note. We maintain our Neutral position on Japanese equities as we believe the risk-reward profile is fair. On the macro front, the Bank of Japan (BOJ) unsurprisingly hiked its benchmark rate by 25 basis points to 0.50% during the January Monetary Policy Meeting, highlighting that Japan’s economic activity and inflation have developed in accordance with its outlook. Japan’s core consumer price index (CPI) rose 3.0% year-on-year for the month of December, and firms have expressed the view that they will continue to increase wages steadily. We expect this to provide a boost to domestic-focused consumer stocks. The higher interest rate environment and a moderately rising trend in loan growth will enhance Japanese banks’ profitability. Furthermore, we believe that ongoing corporate reforms, such as the further unwinding of cross shareholdings, can continue to drive returns for Japanese banks.

One area of risk to Japanese equities would be the potential impact of tariffs from the Trump administration. Constituents of the MSCI Japan Index derive about 20% of revenue from the US, which is higher than most Asia Pacific countries.

Asia ex-Japan – Focus on potential tariffs impact

The MSCI Asia ex-Japan has made a flattish start to 2025 with a wide disparity in performance among the various markets. South Korea has been the surprise outperformer year-to-date. Notwithstanding the ongoing political turmoil and weaking economic growth momentum, investors are hopeful of the possibility of near-term economic stimulus from the Bank of Korea, while valuations are low. On the other hand, India was the biggest underperformer year-to-date due to recent concerns over its GDP growth and continued foreign institutional investor fund outflows. We maintain our Overweight position on Indian equities, as valuations have reset lower to more reasonable levels, although they are still above the 10-year historical average. There is also strong support from domestic flows via the Systematic Investment Plans (SIP), and EPS growth expectations for the MSCI India Index remains decent around the mid-teens level.

The focus of investors will be fixated on the impact of potential tariffs and persistently high US Treasury yields. We note that based on the various MSCI indices, Taiwan and Korea have the largest sales exposure to the US (approximately 36% and 23% respectively), while exposure for ASEAN countries and China are low at 0%-3%.

China/HK – Navigating a bumpy path

While we remain constructive on Chinese equities, we advocate a defensive stance, focusing for now on defensive yield plays and policy beneficiaries given tariff uncertainty and a policy vacuum in the near term. US President Trump has announced an additional 10% tariff on Chinese goods, while China has retaliated with tariffs on certain US energy and machinery, amongst others.

Concerns about China’s policy responses are likely to make equity markets more vulnerable to volatility in 1Q2025. The timing, size and scale of policy delivery and implementation are key points to watch in mitigating the impact of US tariffs. The official quantitative targets will only be unveiled at the National People’s Congress (NPC) in March 2025. The focus will be on policy support to buffer external challenges, stabilise the real estate market and stimulate domestic consumption. Based on consensus, the market expects the headline fiscal deficit will be lifted to 4% of GDP (versus 3% last year).

China’s financial regulators announced a basket of measures aimed at stabilising the stock market by encouraging long-term funds, such as annuities, insurers, mutual funds and pension fund, to increase their asset allocation to domestic equities. This may support market sentiment and are in-line with the ongoing effort to cultivate a “slow-bull” market in the onshore A-shares equity market.

Global Sectors – Technology triumphs

January felt like half a year ago, as investors had to digest various announcements from the Trump administration, developments in the AI realm with DeepSeek’s R1 model, and the start of the earnings season for companies as they offer guidance for the year ahead, amongst other developments.

DeepSeek-induced volatility

In Technology, the Stargate announcement was initially cheered by investors, given the AI infrastructure joint venture’s plan to invest up to US$500 billion over the next four years. This helped to assuage fears that we have moved past peak compute demand. However, the DeepSeek development has thrown into question the need for large AI CAPEX, thus causing a significant drop in many AI-related stocks.

In our view, the advancements and efficiency in large language models (LLM) need not cause a CAPEX cliff. Instead of buying fewer GPUs to build the same quality of models, we would expect leading US companies to still buy just as many GPUs and perhaps get even better performance. In other words, AI buying is based on performance rather than price and we do not think that this view would change. We also believe that such developments can help to spur usage, which helps to enlarge the entire AI ecosystem in aggregate over time. We continue to be constructive on the AI complex, though in the short term, we see potential headwinds from increasing likelihood of further tightening in export/trade-related restrictions.

Ripples felt elsewhere as well

Besides Communication Services, the sectors that have performed well since the start of the year are Healthcare and Financials. These are some areas of the economy which stand to gain substantial benefits from widespread adoption of AI with lower costs.

The Energy sector started the year well but calls for lower oil prices by President Trump as well as concerns regarding a dimmer outlook for natural gas demand because of DeepSeek have also impacted natural gas exploration and production (E&P) companies. In our view, while the power generation theme is important to the demand outlook, it is still a far second to liquified natural gas (LNG) exports, which is expected to increase materially over the longer term.