Asia ex-Japan (AxJ) markets faced multiple global disruptions in 2025; after the much-anticipated China stimulus blitz at the end of 2024, the region started 2025 with the re-election of Donald Trump, the launch of DeepSeek, the rollout of reciprocal tariffs between the US and its trade partners, and the conflict between Israel and Iran, to name a few. Yet, the region’s markets have delivered stellar YTD growth of over 15%.

While China’s stimulus blitz in late 2024 – which investors welcomed with caution – was weighed down by the Trump administration’s exorbitant tariffs, the policy initiatives have helped anchor the return of risk appetite for North Asia. In a year marked by global dissonance, AxJ markets have quietly composed a symphony of resilience, as shown in the chart. While risks remain around US-China trade dynamics and Middle East tensions, the region’s fundamentals, policy agility, and valuation appeal suggest that the music may play on.

Crucially, US and Chinese officials appear to be working towards extending the tariff détente with discussions on how to further defuse trade tensions. A trade framework has ostensibly emerged between the world’s two largest economies, with China lifting the export ban of critical minerals like rare earths, and the US rescinding export controls on supplies related to cutting-edge technology, i.e. AI chips and semiconductor design software. This sets a precedent for further truces between the US and other regional trade partners, paving the way for more benign markets.

In particular, the reversal of the H20 chip ban signifies a crucial deescalation in the US-China impasse, underscoring a mutual interest in avoiding disruptive trade conflicts. Looking ahead, while new tariffs may emerge between trade partners, recent history suggests that anything beyond mere posturing is usually open to negotiation.

Year-to-date, markets across Asia have largely delivered positive returns, with South Korea, Hong Kong, and China taking the lead.

Singapore, known for its stability and sustained dividend yields from REITs and the financial sector, similarly recorded gains on the back of its status as a safe haven.

Concurrently, escalating conflicts in the Middle East have put AxJ’s growth outlook into question, given the latter’s heavy reliance on the former for oil. That said, oil price volatility and disruptions to energy supply are unlikely to significantly impact AxJ’s freight, trade, production costs, and supply chain as the region has substantially reduced its dependence on oil as its primary source of energy.

APAC’s total energy consumption per unit of GDP – a measure of energy efficiency – has markedly declined, thanks to the adoption of cheaper renewable energy sources, a strategic pivot towards service-oriented industries, and the increased proliferation of technology. This transformation has significantly reduced the region’s vulnerability to fluctuations in oil prices and disruptions to supply. Consequently, shifts in oil supply will not singlehandedly derail growth or trigger runaway inflation. In fact, inflation levels across the region have largely been muted, providing central banks with ample room for monetary easing to stimulate growth.

Governments take the lead to boost market sentiment, more to come
The Singaporean government’s recent SGD5bn Equity Market Development Program (EQDP) has injected a renewed sense of optimism into the region’s capital markets.

The policy strongly signals an unprecedented commitment to revitalise Singapore’s equity markets and is likely to reverberate throughout the region. Financial market regulators in neighbouring markets are likely to respond in kind with a series of parallel policy responses, setting the tone for continued momentum.

China – Policy-led stabilisation gaining traction
China continues to gain traction with policy support, improving consumer spending and capital investment for technological innovation. Fiscal stimulus that was introduced in 3Q24, as well as ongoing monetary easing, are beginning to take effect and stabilise domestic conditions.

A prolonged streak of deflation, contractions in producer prices extending beyond the 33rd straight month, and near-zero CPI numbers reflect ongoing weakness. On the other hand, this provides a strategic edge in maintaining export competitiveness and softening the impact of US tariffs. This is akin to the situation in 2018, when Chinese firms demonstrated their agility to sustain profitability.

While headline growth metrics have been subdued in 2025 thus far, the path forward is gradually shifting away from a high reliance on real estate investments.

Aware of the close linkages between industrial profits and equity market performance, policy makers are becoming more inclined to support the shoring up of manufacturing activities, which will in turn be reflected in equity returns.

China’s consumption-led rebalancing has emerged as a strategic imperative, not merely for economic stability but as a geopolitical hedge against escalating trade tensions. The solution lies in services consumption and structural reforms: wealth redistribution, SOE modernisation, and the hukou reform to revitalise household spending. While goods prices remain under pressure reflecting supply-demand mismatches, services demand exhibits elastic growth potential once basic needs are met, thus boosting the domestic momentum.

Essentially, this is not a zero-sum trade-off with investment. A sustained consumption backdrop will drive ROI-focused capital allocation, creating a virtuous cycle: enterprise investment in R&D and capacity upgrades, while fiscal rebalancing toward social welfare (vs inefficient public investment) will drive disposable income growth. The consumption weight in GDP between China and the US (57% vs 81%, World Bank 2024) underscores the long runway ahead for China to narrow the gap. For investors, this transition presents a compelling opportunity to reposition into high-beta domestic demand themes that remain structurally undervalued relative to their long-term potential.

Addressing ‘involution’

Cognisant of the excessive and heavily disruptive competition among local firms, the Chinese government has rolled out ‘anti-involution’ initiatives: structural shifts to address deflationary pressures and tackle overcapacity.

While the initial measures of verbal guidance, industry self-discipline, and targeted capacity cuts may temporarily stabilise prices in sectors such as materials, manufacturing, EV supply chains, and online commerce, it is imperative to have more concrete measures for lasting impact.

The ultimate outcome will hinge on broader structural reforms – specifically, enforcing capacity rationalisation beyond administrative controls, rebalancing growth toward consumption, and improving revenue streams of local governments. We view this as a multi-quarter process requiring patience, while any sustained improvement in corporate profitability will depend on the sustainability of the policy. Additionally, of equal importance is the ability of policy makers to engineer a gradual and broad-based soft landing of the embattled real estate sector, which has weighed on confidence.

Having endured a volatile 2025 and the preceding headwinds-plagued years characterised by earnings drag and real estate overhang, China appears to be at an inflection point. Beijing’s decisive policy pivot, marked by sweeping, coordinated measures to restore confidence and reignite domestic demand, is beginning to yield its intended results in 2025. These efforts are also laying the crucial groundwork for sustained momentum into 2026 and beyond.

ASEAN – Bracing for a 4Q25 slowdown, policy to cushion impact

The ASEAN 2025 EPS growth forecast has been revised down from 7% in April to 4%, yet we believe the earnings trough — particularly on trade-related pressures — has likely passed. Two factors underpin this view: (i) the US tariffs imposed on 1 Aug proved less punitive than initially feared, and (ii) further fiscal and monetary support in 4Q25 should provide a near-term buffer.

Economic growth is set to slow in 4Q25 as front-loaded exports in 1H fade and tariff-driven demand weakness emerges. In response, central banks — having successfully managed inflation — are expected to cut policy rates by c.50 bps, even as governments are preparing stronger fiscal stimulus. This coordinated easing should help cushion domestic demand, while lower borrowing costs are set to ease pressures on households and corporates, benefiting sectors such as real estate and technology.

Despite strong YTD performance, ASEAN equities remain attractively valued and under-owned by foreign investors, leaving room for further reallocation into the region.

Our preferred ASEAN sectors include S-REITs and banks in Singapore. We remain constructive on S-REITs as stronger distribution per unit (DPU) growth in 4Q25 is expected, supported by positive rental reversions and lower interest rates. Distributable income should outpace net property income (NPI), reflecting the increasing tailwind from falling funding costs. Despite the sector’s rally alongside lower SORA rates, valuations remain undemanding with dividend yields still attractive. Although lower interest rates are beginning to weigh on banks’ net interest margins (NIM), dividend yields around 5% — well above local bond yields — are both attractive and sustainable, providing a strong anchor for share prices. Additional support comes from rising fee income in the wealth management and treasury businesses. Importantly, dividend yield spreads for both banks and REITs remain above their historical averages, reinforcing relative value. Elsewhere, special situations in unlocking value and beneficiaries of EQDP provide ample stock selection opportunities in both large and mid-cap names.

We foresee a broader rotation into higher-quality, more liquid names in Indonesia in 4Q25, supported by undemanding valuations and the resilient macro environment. We are positive on the country’s consumption, which is driving earnings in the banking, staples, retail, and autos sectors.

The burgeoning AI integration and rapid expansion of digital infrastructure across ASEAN are poised to uplift the communication service sector through improved cost efficiency and the monetisation of data centre assets. Notably, telecommunication firms that have proactively invested in technology superiority are exceptionally well-positioned to capitalise the digital pivot. These include those in Singapore and Indonesia.

Improving macro dynamics in India

S&P Global Ratings has upgraded India’s sovereign credit rating to ‘BBB’ from ‘BBB-’ citing improved fiscal management, robust growth, and stable monetary policy as key reasons behind the upgrade.

Meanwhile, the 50% US tariffs on Indian exports should have limited macro impact. Exports to the US represent only 2.3% of India’s GDP; even then, almost a quarter, representing 0.6% of GDP, is exempt (electronics, pharmaceuticals). The remaining 1.7% is concentrated within the jewellery, textile and apparel sectors, where margin pressure may emerge. While India’s tariffs are now higher than ASEAN’s, we do not expect this to derail FDI flows. Multinationals are increasingly investing in India, establishing local production to cater to the large and expanding domestic market. Examples of which include Chinese smartphone makers, and EV manufacturing facilities built by China, Japan, and Korea auto companies, as well as global consumer brands in personal care, household items and F&B. Special economic zones and policy incentives are also driving investment into semiconductors, electronics, data centers and renewable energy. At the same time, trade diversification with the UK and EU, and improving China ties reduce external risk. Coupled with supportive fiscal and monetary policies, this should support growth.

We see a recovery in corporate earnings from 1QFY26, led by consumption and GST reform tailwinds. We maintain Overweight in India and see India as a beneficiary of EM flows amid the US asset-diversification trend. Banks and consumers are our preferred sectors.

Sector recommendations: Overweight technology, consumer discretionary, financials, and communication services

Country recommendations: Overweight China, India, Singapore, Indonesia

We reaffirm our positive stance on China, India, Singapore, and Indonesia, driven by a combination of structural tailwinds, supportive policy frameworks, and relative insulation from external shocks.

China stands to benefit from a rebound in sentiment, led by advances in artificial intelligence and digital infrastructure. While macro headwinds persist, targeted policy support and improving earnings visibility in select sectors provide an anchor for equity markets.

India continues to demonstrate robust growth momentum, underpinned by strong domestic consumption, manufacturing diversification, and a reform-oriented policy environment. Its demographic dividend and expanding role in global supply chains offer long-term upside potential.

Singapore serves as a defensive play in the region, supported by resilient financials, high governance standards, and its role as a regional capital hub. Sector rotation and fund flow have remained constructive in areas like industrials and REITs.

Indonesia, the largest economy in ASEAN, offers attractive macro fundamentals like fiscal prudence, a vast population, and a resource-rich economy, making it a strong candidate to weather global volatility. Despite short-term policy uncertainty due to a cabinet reshuffling, we believe a pro-growth agenda including fiscal expansion and rate cuts should follow, thereby sustaining long term growth prospects.

Asia ex-Japan – Tailwinds supporting a constructive outlook

Valuation discounts: Asia ex-Japan equities trade at deep valuation discounts to global peers – 35% discount on forward P/E and nearly half in price-to-book. This offers a meaningful margin of safety in a world fraught with geopolitical uncertainty.

Earnings resilience: Corporate earnings in populous markets such as China, India, Indonesia, as well as technology-oriented exporting countries like South Korea, are positioned for positive surprises, driven by domestic competence, digital transition, and supply chain diversification.

Capital rotation: As global investors rotate into under-owned and attractively priced markets, Asia ex-Japan appears in the sweet spot to attract renewed attention. This will be particularly profound as investors recalibrate their investment alignment in an uncertain world.

Currency rebalances: The accelerating de-dollarisation trend is reshaping capital allocation dynamics, as regional central banks diversify reserves and corporates shift toward local currency financing, creating a compelling case to reassess underweight positions. This structural shift, reinforced by deepening regional trade corridors, enhances the appeal of Asia’s local-currency assets

Structural themes: The region continues to embrace and invest in AI development, green energy, and digital infrastructure. The emergence of open-source AI platforms, expansion in semiconductor chips manufacturing, and population advantage underscores the ability to innovate, disrupt, enable, and adapt

Asia ex-Japan: Positioned for a turning point

Despite 2025 headwinds from the web of intertwined trade tariffs and geopolitical tensions to earnings pressures in select sectors, 2026 is shaping up to be a transitional year marked by not just disruption, but also opportunity. Asia ex-Japan offers a compelling investment proposition where strategic investment positioning involves focusing on beneficiaries of structural tailwinds and domestic policy buoyancy, while mitigating exposure to near-term macro and geopolitical risks.

China, India and Indonesia are already delivering reform-driven measures, while ASEAN is set to benefit from local policy agility and demographic advantages. We advocate a focus on the next phase of growth by positioning for winners of structural reform, policy tailwinds, and the revival of domestic demand.

We favour a barbell approach in pairing structural growth with quality income. On the growth side, anchor in secular themes to leverage on domestic services, platform firms, AI innovations, technology developments, and policy-supported growth beneficiaries like EV leaders, industrial automation and upstream semiconductors. On the income side, stay invested with stable income providers and large cap financials that distribute compelling dividends.