Chief Economist
Tariffs and significant US policy uncertainty are expected to dampen global growth in 2025. Growth in the US will be subdued at 1.2% -1.5% with risk skewed to the downside. Even if the current reduced tariffs of 30% against China (with some exclusions) and a 10% across the board for other countries are implemented quickly, this still amounts to a tax hike of approximately 1.5% of US GDP, marking one of the largest single-year increases in decades. Tariffs and slower US growth imply slower growth for Asia and Emerging Markets (EMs). Countries in these regions with policy flexibility will be able to better withstand external shocks.
Weaker US growth and ongoing geopolitical stress are likely to drive some further repatriation of funds out of the US dollar over the next year. We expect most Asian currencies to strengthen somewhat as part of this USD depreciation. Contained inflation in most of Asia and EMs, as well as stronger Asian currencies give central banks room to cut rates in economies where inflation is below target levels to support growth. The combination of stronger currencies and interest rate cuts should increase the attractiveness of Asian asset markets for international capital flows.
By adding Asia to a diversified portfolio, investors can benefit from diverse and unique opportunities, ultimately enhancing the portfolio's resilience and potential returns.
Uncertainty over the longer-term outcome of the tariff negotiations can continue to trigger intermittent market volatility. Against the current backdrop, investors should seek greater diversification which suggests greater upside potential for Asia and EMs given their more attractive valuations and lighter positioning in portfolios. Rebalancing from overvalued markets to more attractively valued ones with improving fundamentals is a prudent strategy.
Japan for example remains one of the cheapest markets globally, on a price-to-book basis. Similarly, for China, the H and A-shares remain attractive, providing opportunities for bottom-up investors. Meanwhile Indian equities have been resilient despite being deemed expensive at the start of 2025. The backdrop however remains favourable on continued Reserve Bank of India support, sluggish oil prices and resilient domestic inflows. While valuations could become a headwind at some point, active managers should still be able to find opportunities.
Within the bond universe, there are opportunities to acquire high-quality assets at favourable valuations. Asian 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.