21 May 2025

Eastspring Investments 2025 Mid-Year Market Outlook Asia Key to Diversification Amid Market Uncertainty

• Tariffs and significant US policy uncertainty anticipated to dampen global growth
• Asia and Emerging Markets poised to benefit from diversification needs and a weakening USD
• Investment strategies should prioritise active and agile investing, portfolio diversification, and defensive sectors

SINGAPORE (21 May 2025) – In its mid-year market outlook, Eastspring Investments (“Eastspring”), the USD256 billion¹ asset management business of Prudential plc, analyses the global macroeconomic environment and explores investment opportunities in Asia and Emerging Markets for the second half of 2025, against a backdrop of US-driven market uncertainty.

Ray Farris, Chief Economist, Eastspring Investments, sets the scene: “The outcome of the US-led trade deals will determine the future of the global economy and markets. However, trade deals tend to be long, drawn-out affairs.”

Asia’s growth expected to slow commensurate with the tariffs applied to each market

In China, the recent cut in the US tariff rate has brought the weighted average rate down to approximately 35%, implying a 1% of GDP headwind to China’s growth this year. Nevertheless, Eastspring anticipates China’s GDP to grow close to 4.4% this year, supported by fiscal stimulus and targeted policy easing.

India, in contrast, is seen as Asia’s largest winner in the current trade environment. With exports to the US accounting for just 2.2% of GDP – the second lowest in Asia – India is expected to grow 6.3% this year and 6.5% next year. A trade deal with the US could benefit India by making it a more attractive production site for companies relocating from China.

Japan's outlook, with growth projected between 0.6% to 0.8%, largely hinges on securing a trade deal with the US. Meanwhile, ASEAN countries face varied outcomes, with growth in trade-dependent nations like Vietnam, Malaysia, Singapore, and Thailand likely to slow by 0.5% to 2.0% due to weaker exports. Indonesia and the Philippines are likely to be the least affected, and we expect the Philippines GDP growth to sustain at 5.6% this year.

Asian currencies positively impacted by a weakening USD

While the USD will maintain its reserve currency status for the foreseeable future despite growing concerns over its longer-term outlook, further repatriation of funds out of the USD will push it down at least 4% – and possibly as much as 10% – over the next year.

Asian currencies are expected to strengthen as part of this USD depreciation. Importantly, Asian central banks are likely to allow more appreciation than historically because they will want to avoid being accused of currency manipulation during current trade negotiations with the US. This combination of stronger currencies and interest rate cuts should increase the attractiveness of Asian asset markets for international capital flows.

How does this macroeconomic backdrop translate into Asian equity and bond investment opportunities?

Commenting on the outlook for Asia and Emerging Markets assets, Vis Nayar, Chief Investment Officer, Eastspring Investments, said: “With attractive valuations and light positioning, there is greater upside potential for Asia and Emerging Markets as investors seek greater diversification. Corporate earnings are also holding up well, particularly in Asia ex China with recent upgrades in India, Taiwan and Korea.”

Equities: Pockets of opportunities across Asia and Emerging Markets

• China: Eastspring is cautiously optimistic towards China equities over the medium to long term. Valuations of H- and A-shares remain attractive, providing opportunities for bottom-up investors. With expectations for a major stimulus tempered post the April Politburo meeting, the risk of disappointment is lower, leaving room for upside surprises.
• Japan: Japan remains one of the cheapest markets globally, on a price-to-book basis. Earnings growth and free cash flow are also relatively strong. With robust corporate reforms and rising wage growth, Japan equities offer a compelling long-term proposition for global investors.
• India: Despite being deemed expensive, India equities have shown resilience. Continued RBI support, sluggish oil prices and resilient domestic inflows create a favourable backdrop for India equities. While valuations could become a headwind at some point, active managers should still be able to find opportunities.
• Emerging Markets: In Latin America, the absence of incremental tariffs (at the point of writing) on Mexico was a positive surprise. Brazil is also a relatively closed economy with 80 to 85% of its GDP domestically driven. Meanwhile, the CE3 economies (Poland, Czech Republic, and Hungary) have less than 2% of their revenues tied to the US.

Fixed income: Prioritising defensive sectors

Given the current fluid environment, investors should maintain a globally diversified bond portfolio and rotate to countries that benefit from tariff de-escalation, supply chain re-routing, and domestic support.

In Asia, local currency bonds present a compelling investment opportunity due to their attractive real yields and resilient economic fundamentals. Their low correlation with developed market assets and gradual inclusion in major bond indices also enhance their diversification appeal.

Eastspring’s view is to add duration to bond portfolios across local Asia and Emerging Markets on any meaningful rates sell-offs.

Vis Nayar concludes that, “Agile investors can take advantage of dislocations arising from market volatility. Active stock selection is key in this market. By including Asia in a diversified portfolio, investors can benefit from the region's dynamic growth, diverse industries, and unique investment opportunities, ultimately enhancing the portfolio's resilience and potential returns.”

Please visit https://www.eastspring.com/insights/outlook/2025-mid-year-outlook to download the full report.

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