Looking into 2025, we remain constructive on equities, with Overweight positions in both US and Asia ex-Japan equities.

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

Looking into 2025, we remain constructive on equities, with Overweight positions in both US and Asia ex-Japan equities.

We upgraded US equities on 7 November 2024, based on our assessment that the risk-reward of US equities has improved given the US election outcome, as a Trump presidency will likely boost the US economy and corporate earnings through tax cuts, de-regulation and increased spending.

Although Asia ex-Japan equities are likely to be negatively impacted by Trump’s tariffs, we believe that countries are more prepared this time compared to his first administration years ago with countermeasures in store. Within the region, we favour China, Hong Kong, India, Indonesia, the Philippines and Singapore equities. Investors’ focus will remain on China, which had a significant policy shift in September. This was a pivotal moment that signalled a change in policy direction especially in the housing market which comprises a sizeable portion of household wealth.

In 2025, we expect Europe and Japan to contend with their respective issues, such as political uncertainties, ailing competitiveness, and currency volatility. We maintain Neutral positions in both regions’ equities.

US – Taking a constructive view

We recently upgraded our position on US equities from Neutral to Overweight. We believe that the risk-reward for US equities has turned more positive given that a Trump presidency is likely to be stimulative for growth and corporate earnings.

First, the tax cuts that were part of the Tax Cuts and Jobs Act (TCJA) are likely to be extended, while further corporate tax rate reductions cannot be ruled out.

Second, Trump’s fiscal policies are likely to boost the economy and be earnings-per-share (EPS) accretive for US firms. These would include increasing military spending and exempting overtime income from taxes.

Third, a Trump administration’s broadly deregulatory approach is likely to be pro-growth, and the boost to small business confidence is likely to offset the headwinds from higher tariffs.

Europe – Trump 2.0 starting in 2025

Should tariffs be implemented, the impact will likely be two-fold: indirectly via investor confidence and directly through tariffs on European goods exported to the US. Among the various industries, Machinery/ Equipment, Pharmaceuticals and Chemicals make up the largest shares of European exports to the US. At the index level, about 20% of the Stoxx 600 Index revenues come from the US, with segments such as Healthcare and Luxury Goods having revenue exposures greater than 25%. On the other hand, Utilities and Real Estate are less exposed. As for taxes, in Trump’s first term, the corporate tax rate was cut from 35% to 21%, and he has now floated additional cuts of as low as 15% for firms that make their products in the US. Should this be implemented, the effective tax rate could fall below most European peers, freeing up cash for growth with positive spillovers for Europe. However, firms may be incentivised to book a larger share of pretax income in the US and there could even be relocations.

Japan – Balanced risk-reward dynamics

Although the overhang from Japan’s Lower House elections and the US presidential elections have been lifted, equity market volatility is likely to stay given currency fluctuations and uncertainties over the BOJ’s policy stance. Earnings revisions have also turned negative (on a rolling 4-week basis) over the past two months. However, we still see positives from ongoing corporate governance reforms, higher Nippon Individual Savings Account (NISA) participation rates and the transition to an inflationary economy which are medium to longer term drivers for the Japanese equity market. In terms of positioning, we see opportunities in Japanese banks given the gradual normalisation in interest rates. We also like domestic-oriented companies given our expectations of Yen appreciation ahead. We also see opportunities within the industrial automation and generative artificial intelligence (AI) space.

Asia ex-Japan – Reiterating our Overweight position heading into 2025

We maintain our overall Overweight position in the MSCI Asia ex-Japan Index as we head into 2025. We reiterate our Overweight positions in China, Hong Kong, India, Indonesia and Singapore.

We like Indian equities due to its solid economic and EPS growth outlook, while we expect its equity market to be supported by robust domestic inflows, particularly from the SIPs (Systematic Investment Plans). We like Indonesian equities for its attractive valuations and the government’s target of attracting foreign investments and expanding its annual economic growth. For Singapore, we believe a higher for longer interest rate environment will be beneficial to the banking sector, which forms a significant weight in the MSCI Singapore Index. We also like the country’s relative defensiveness during times of uncertainty.

Separately, we make three changes to our ratings within the region. We upgrade our position in Philippines equities from Neutral to Overweight. Based on consensus estimates, GDP growth is expected to accelerate from 5.8% in 2024 to 6.0% in 2025, while the consumer price index (CPI) is expected to ease, thus leaving room for the central bank to further lower its benchmark rates. The MSCI Philippines Index also offers attractive valuations. We downgrade our position in Korean equities to Neutral, and our position in Thailand equities from Neutral to Underweight.

China/HK – Gauging policy effectiveness

We remain constructive on Chinese equities given the policy pivot although volatility should remain elevated with potential tariff hikes and geopolitical tensions under Trump 2.0.

The National People’s Congress session in November unveiled a CNY10-12t fiscal package focusing on local government debt swap. While the market was disappointed with little mention of demand stimulus measures, we believe the government will have to step up stimulus measures going into 2025. Policymakers also provided forward guidance that more supportive policies are being assessed, such as increasing the official fiscal deficit and supporting domestic consumption. We believe the Central Economic Work Conference (CEWC) in December will be the venue to assess the potential impact of higher US tariffs and set the policy tone for next year, with the potential for more measures to be announced in 1Q2025.

We prefer onshore A-share equities to offshore equities in the near term considering the support from the “national team” and the latest PBOC swap and relending facilities. At the sector and industry level, we prefer domestic-focused firms and quality yield stocks to cushion against market volatility, as well as policy beneficiaries. On the other hand, exporters with high US revenue exposure are least preferred. We advocate a barbell strategy in focusing on

1. large-cap, index-heavy internet and platform companies and market leaders;
2. quality yield stocks to cushion market volatility, and
3. policy beneficiaries.

Global Sectors – Technology triumphs

As we approach the end of 2024, we find that the IT and Communication Services sectors continue to lead the pack so far this year. The Magnificent Seven have been key drivers of this rally, perpetuated by the artificial intelligence (AI) boom and exacerbated by the continued growth in indexing and exchange-traded funds. On the other hand, the Materials sector has been weighed down by global demand concerns, and also the risk that a trade war (induced by Trump’s tariffs) would be a drag on industrial production, while commodity prices are indirectly impacted by a stronger USD and higher real rates.

For 2025, we maintain our constructive stance on IT and Communication Services. First, the AI narrative is likely to feature strongly next year – hyperscalers are likely to put through elevated CAPEX levels while firms continue to seek monetisation avenues for the technology.

Second, Big Tech firms are still expected to register healthy earnings growth in 2025, on the back of robust advertising, e-commerce and cloud prospects.

Third, large-cap, index-heavy internet and platform companies in China could benefit from the ongoing domestic stimulus efforts while light investor positioning and undemanding valuations are creating an attractive setup going into 2025.

Finally, under a Trump administration, regulatory intensity could be more lenient at the margin, while hardware firms selling into the internal combustion engine/hybrid vehicles space could see some tailwinds. However, we expect tariffs to be a potential challenge for some PC/server original design manufacturers which manufacture and assemble their products within the Greater China region.

We also continue to favour Consumer Staples and Healthcare and are upgrading the Consumer Discretionary sector from Neutral to Overweight. The effects of Trump’s tax cuts should trickle down to businesses, wages and overall consumer health, benefitting the Consumer sector – more so for the Consumer Discretionary space. We are cognisant that certain retail stocks, especially those with significant overseas linkage, may be impacted by tariffs, but such firms could also choose to pass on the higher costs to consumers especially those with pricing power.