2025 Market Outlook: Equity Strategies for a Volatile Market

Benefiting from 'America First' approach, remain upbeat on US equities in short term
Chinese equities could see volatility on Trump's return; High-dividend stocks in focus
Neutral on Japanese equities due to murky monetary policy and currency volatility
Domestically driven India relatively insulated from external factors

Fundamental soundness becomes increasingly paramount as the market faces fresh uncertainties

Trump's decisive victory and return to the White House for a second term, coupled with a Republican sweep in Congress dispels election-related uncertainties. With the US economy continuing its growth trajectory, driven by Trump's 'America First' agenda, BEA Union Investment maintains an optimistic short-term view on US equities. However, Trump's proposed policies also raise market concerns. Measures such as corporate tax cuts, tariff hikes, and deregulation could significantly impacts on US deficits, inflation, monetary policy, and global financial markets. Furthermore, Trump's stance on the Russia-Ukraine conflict, the Middle East, and broader foreign policies could redefine the international order, potentially escalating geopolitical tensions.

Source: S&P Global as of 7 Feb 2025, reference value rebased to 100 for December 2023

US protectionism could take a toll on the world economy and global demand, leaving export-dependent nations and industries particularly vulnerable. Trump has followed through on his pledge to raise tariffs on Chinese imports by 10%, which has already sparked retaliatory measures and heightened trade tensions. Currently, China's economy, still undergoing transition, needs time to recover, despite the government's launch of a spate of economic and fiscal support measures. Europe, heavily reliant on China, faces a double whammy. Therefore, we adopt a cautious stance towards European equities while maintaining a neutral view on Asia, including China and Japan, due to their reasonable valuations. Within Asia, we prefer India, which is relatively less affected by external volatility.

Trump's 'America First' agenda will benefit US economy, drive cyclical and quality small cap stocks

During his campaign, Trump vowed to lower corporate taxes and ease regulations across various industries, including banking and artificial intelligence (AI). In a bid to honour these commitments before the midterm elections in 2026, it is expected that Trump may swiftly implement these policies. While Trump's policies may pose threats to the global economy, they are likely to bolster US economic growth and corporate profitability in the near term. Favourable conditions, such as resilient US macroeconomic data, strong corporate earnings, and current inflation trends, will bode well for cyclical stocks and high-quality small caps. In addition, growth stocks, including those in the high-end semiconductor and AI sectors, will also remain in the spotlight. Trump's plan to relax restrictions on the AI industry could further cement US leadership in this space. Other markets to monitor include Taiwan, South Korea, and Japan.

How Trump implements his policies will have a significant impact on US macroeconomic health. The already sky-high US deficits could face additional pressure in the long term if corporate tax rates are sharply lowered to 15% from the current 21%. On the other hand, if tariffs surge, inflation could rebound, potentially affecting monetary policy and global asset prices. Investors have found reassurance in Trump's pick of prominent financial expert Scott Bessent as US Treasury Secretary, who is expected to prioritise US economic and market stability.

Favour Asian domestically driven stocks and dividend plays; Trump Factor may drive short-term volatility in Chinese equities

The valuation of Asian equities remains reasonable, but investors should evaluate how different asset classes will react after Trump’s return to office. BEA Union Investment believes that, until there is clarity on policies, the focus should be on domestically driven markets and stocks to avoid being caught in the crossfire of currency volatility or trade wars.

China's rescue package and US-China relations remain at the forefront. Following Trump's inauguration, our team sees greater volatility in Chinese equities. China's economy is exhibiting early signs of stabilising, but its recovery remains fragile and uneven. Recent property price improvements and industrial profits suggest some positive momentum, but retail sales have missed expectations. The Chinese government announced a RMB10 trillion package over the next five years to address local government debt and alleviate their interest expenses. However, investors believe the measures will have a limited immediate impact on stimulating the economy. The Chinese authorities have already implemented several policies in the last few months, and our team sees the need to observe the effects. As China's economy faces numerous challenges, compounded by the Trump Factor, we hold a neutral position on Chinese equities. Nonetheless, given that Chinese shares are trading at reasonable valuations and are supported by domestic investors, the team favours solid, high-dividend stocks, including those in the banking, telecommunications and energy sectors.

Japan's overall economic fundamentals remain stable, with wages continuing to increase. The Bank of Japan has recently raised interest rates to 0.5%, the highest level since 2008, driven by rising inflation and wages. However, given the increased volatility in the Japanese yen, our team maintains a neutral stance on Japanese equities. Although Japan is normalising monetary policy, the process will be slow and murky. Given the persistent divergence in US-Japan monetary policies, the yen will likely remain volatile, which will subsequently affecting the performance of Japanese equities.

Source: dashboard.e-stat.go.jp as of 7 Feb 2025

Within Asia, the team remains bullish on India, whose economy is driven by domestic demand and structural growth. Since Prime Minister Narendra Modi assumed leadership, the nation has been channeling 5-6% of its GDP into infrastructure spending. This, combined with policy stability and a growing middle class, is propelling steady growth across the retail, finance, and property sectors, thereby reducing India's dependence on other countries. Its stock market, as a result, is less vulnerable to global economic volatility. Sectors favoured by our team include finance, industrials, telecommunications, and energy providers.

Trump's return in 2025 will bring new perspectives and challenges to international relations and global markets, while complicating China's path to economic recovery. In light of these fresh uncertainties, fundamental soundness becomes increasingly critical. Currently, our team favours US and Asian technology industries with robust structural growth potential, as well as Chinese and Japanese value stocks that are trading at reasonable valuations. Also in focus are Indian equities driven by domestic demand and those relatively insulated from global economic volatility.