Global markets have so far had a fairly rocky start to 2025. The US administration’s slew of policy initiatives to investigate various bilateral trade and investment relationships may pave the way for more restrictions on trade. With lingering tariff uncertainties, markets expect inflation to remain higher for longer, especially in the US. This may hamper the pace of potential interest rate cuts by the Federal Reserves over the medium term. And Asian central bankers will need to find the balance between maintaining stable financial flows and stimulating domestic demand. Despite that, there have been some dynamic shifts within the region that are creating attractive opportunities for Asia’s Giants of China, India and Japan.
Peiqian Liu, Asia economist, at Fidelity International comments: “US trade policy uncertainties and tensions may be a drag on Asia’s growth outlook, but not all economies are facing equal risks. Looking beyond the immediate impact of tariffs on exports and global demand, rising trade uncertainties might be a catalyst for markets to search for resilience and growth via bolder reforms, more regional collaborations, and more support for domestic demand. China’s recovery, particularly with regards to its domestic demand growth, becomes more critical and could potentially be an alternative source of demand for most of the export-oriented Asian economies.
“Since the first episode of trade tensions with the US in 2018-19, China has already started preparing for trade related uncertainties. Over the past few years, it has greatly diversified its supply chain to more trading partners such as the ASEAN bloc, Latin America and African countries while decreasing its share of exports to the US. With this proactive realignment of the supply chain, we think China might be able to withstand higher tariff pressures.
“At the same time, China has also pivoted inward to support domestic demand, which could partially offset potential external pressures. Since the last quarter of 2024, China has decisively made boosting domestic consumption and nurturing ‘new productive forces’ a top priority. In the latest National People’s Congress (NPC), China rolled out a moderately expansionary fiscal easing package and a special task force to promote consumption. These policies could effectively support consumption going forward as external pressures mount. It is worth highlighting that the Government Work Report has signalled degrees of flexibility and highlighted the willingness to remain nimble to allow additional policy easings to be announced swiftly and implemented decisively should external conditions deteriorate going forward.
“While India might face higher risks if reciprocal tariffs are implemented, given its higher tariff differentials with the US, considering India’s relatively low dependence on exports as a growth driver, the economy might be more resilient to a global trade slowdown. India’s services exports have grown significantly over the past few years and are now almost on par with goods exports in terms and annual values. Moreover, with a vast domestic market and supportive fiscal and monetary policy settings, we think India will likely see a pivot into domestic consumption-driven growth in coming quarters.
“In the latest budget, the Indian government has announced a significant tax cut for low- and middle-income households, which could be a marginal boost to consumption given their relatively higher propensity to consume. Easing inflation, especially food prices, may also help with consumption. However, we do not expect a steep rebound of growth momentum given the softening of public capex over the last few quarters as fiscal policy turned more prudent. Private sector investments might pick up and might further accelerate should the Reserve Bank of India (RBI) lower the policy rate further.
“Japan is gradually marching into a new phase of more sustained inflation and higher nominal growth as the Bank of Japan (BOJ) embarks on the road of policy normalisation. The ongoing Shunto wage negotiation is sending positive signals for another year of strong wage growth of around 5% for Japanese workers, which will serve as a benchmark for the wage growth momentum for the broader economy. As wages continue to rise, households with real income growth will be more receptive to price increases, leading to a higher inflation equilibrium over the medium term.
“We expect the wage-inflation virtuous cycle to gradually take hold and domestic consumption will again become a main growth driver as external headwinds are set to intensify in coming months. With rising global trade uncertainties, Japan could potentially benefit by encouraging friend-shoring as more countries diversify and realign their supply chain. However, the BOJ may remain cautious in adjusting its policy rate, especially when US trade policies are not clear. We believe the BOJ will continue to assess the momentum of the wage growth and its associated impact on inflation going forward and expect more hikes from the BOJ as inflation stays above target. But any moves will be gradual and at opportune times when the financial markets are relatively calmer and JPY within a comfortable range.”
China’s Controlled stabilisation amidst rising volatility
China has been one of the best performing equity markets in 2025. Post the mini fiscal stimulus in Q4 2024, China’s economic data has visibly improved, and its monetary and fiscal policy stance has also firmly shifted.
George Efstathopoulos, portfolio manager at Fidelity International comments: “It has been encouraging to see consumption responding to China’s policies and subsidies, which sends a signal to both policy makers and market participants that there is a strong link between fiscal stimulus and the Chinese consumer. While more needs to be done, it answers the question that fiscal policies do indeed work even amidst low China consumer confidence levels. The property market has also been responding better to these incremental measures and we have even witnessed some green shoots in the past few months. This could mean that the worst of the property deleveraging cycle is behind us, and potential tail risks have been pre-emptively dealt with.
“China’s January credit data also points to a solid start to 2025, comfortably surpassing consensus expectations and firmly pointing to growing policy support. But probably the most significant occurrence is that of the emergence of Chinese AI. In particular, Deepseek challenges the view that China is vastly behind the US on the Tech front. This has been a strong reminder to investors that China can and does innovate. It has certainly helped with market confidence and sentiment around China's investability is clearly shifting.
“We believe that Chinese AI can help drive earnings, productivity, and even help on the employment front. The meeting this past February between Chinese officials and private tech companies shows that the government is embracing 'new productive forces', and many would consider this development a catalyst for a new China tech chapter. China AI essentially points to improving fundamentals and helps form a new narrative. And the fundamentals are evident in the meaningful positive revision in earnings for this sector and we expect capex to grow in this space, further boosting earnings.
“Currently, improved earnings are very narrowly focused on offshore China tech while the rest of China’s equity market remains uneventful. But this could change should China deliver on additional fiscal headroom. In a world where trade protectionism is on the rise, China needs to stimulate its domestic demand and fire up the second of its dual circulation engines rather than just rely on exports. Doing so would not only help soften tariff headwinds, but more importantly help rebalance the economy and effectively address deflationary forces to create more sustainable growth.
“Such fiscal stimulus would be very supportive for the lagging A-shares market, which has a more domestically focused sector composition, and a more cyclical one too. Unlike offshore tech, which can be more sensitive to both moves in US Treasury yields and trade policy, China’s onshore mid-caps are typically more sensitive to the Chinese consumer. What this means is China holds the fiscal keys to help fight its own deflationary forces, rebalance its economy and create more sustainable growth domestically and by doing so, China onshore mid-caps should be key beneficiaries.”
The rebalancing of India’s economy
India has been on a multi-year upward run, outpacing most major emerging and developed markets over the past five years. This surge has been fueled by various factors, including robust earnings growth and consistent inflows from domestic investors. But this has driven valuations to high levels compared to other Asian and emerging markets, and even when comparing to its own history. As growth slows amidst external volatility, its economy is finding a new balance.
Amit Goel, portfolio manager at Fidelity International comments: “India is one of the fastest-growing major economies in the world. This growth has been largely driven by consumption, thanks to India’s huge youth population, its expanding middle class, and rising incomes. Investments in infrastructure and steps to attract manufacturing to create new jobs for a growing workforce are its additional growth drivers. Its well-managed inflation and fiscal balance has been attractive to investors and its equity market has been one of the best performing in the last four years.
“However, India’s post COVID recovery was two-paced where high-end consumption growth outpaced lower-end consumption. The skilled workforce benefited from higher services sector growth and rise in asset prices, while incomes and jobs for the unskilled and rural segments stagnated. Because of that, India’s economy is now going through a period of rebalancing. The demand growth in the premium segment is slackening, and the government is curtailing its capex to support the lower income segment. As a result, India’s GDP growth is slowing, and corporate earnings are witnessing downgrades. This has impacted the performance of Indian equities and brought valuations lower from peak levels.
“We continue to believe that the ongoing rebalancing of the economy may still have some way to go. With risk of further slowdown in GDP, it is important to remain cautious and selective, particularly in the more expensive parts of the markets such as consumer, industrial and utility sectors. However, there are areas of opportunities not to be missed. Large banks continue to look very attractive and the healthcare sector has relatively better growth prospects. We also have a positive view on the IT services sector which also provides diversification through US dollar revenue streams. Overall, when you take a medium to long term view, India remains very positive and that has interesting investment opportunities, particularly in high quality growth companies as valuations reach more reasonable levels.”
Japan’s wage-inflation virtuous cycle may fuel domestic optimism and support consumption
Japan's economic landscape has been undergoing significant changes, signalling an end to the prolonged period of stagnation with low growth, low inflation, and a low-interest-rate environment. However, the tides are turning, especially with inflation indicators such as the Producer Price Index (PPI) moving higher. This shift is reshaping domestic consumption behaviours after decades of economic inertia.
George Efstathopoulos comments: “One of the remarkable aspects of Japan’s current economic scenario is its growth trajectory. Japan, alongside the United States, is one of few markets that have returned to their pre-pandemic GDP trend growth. This resurgence is underpinned by reflation becoming a tangible reality in Japan. For the first time in over two years, real wage growth is positive, while inflation continues to exceed the Bank of Japan's 2% target. These factors are vital in stimulating economic activity and altering consumption patterns within the country.
“Japanese equities are reaping the benefits of this economic revival. Positive earnings revisions are more prominent in Japan compared to other developed market equities, making them an attractive investment option. When examined through the lens of the price-to-earnings (P/E) ratio, Japanese equities appear relatively cheap, further enhancing their appeal.
“Corporate reform is another structural tailwind in Japan, driven by the need to enhance corporate governance, transparency, and shareholder value. Historically, Japanese companies have faced criticism for their insular management practices and lack of accountability to shareholders. These reforms aim to address these issues by encouraging more efficient operations, profitability, and better financial performance. The government and regulatory bodies have introduced measures to improve corporate governance standards, including the stewardship code and the corporate governance code. This push for reform is partly due to global competitive pressures and the desire to attract foreign investment, which is seen as crucial for Japan's economy.
“The Japanese Yen (JPY) is also exhibiting strength, supported by evolving inflation dynamics. Shifts in interest rate differentials between Japan and other key markets, notably the US, are influencing the currency. These shifts could have interesting implications for Government Pension Investment Fund (GPIF) flows. Moreover, the JPY has recently demonstrated defensive characteristics, adding another layer of attractiveness for investors. It's also encouraging to see that earnings revisions in Japan remain favourable despite the recent strength of the JPY, indicating robust economic fundamentals.
“Japan's mid-cap stocks present a compelling case as they are largely immune to JPY volatility, making them a stable investment option. Furthermore, mid-caps are more attuned to the domestic economy, which is currently experiencing reflation driven by positive real wage growth. This economic environment is reflected in improving fundamentals, as evidenced by rising Return on Equity (ROE) and profit margins among mid-cap companies. The structural corporate reform narrative also appears to be benefiting mid-caps, as seen in the notable increase in dividend yield.”
