We continue to see 2025 as a year of decent earnings growth but keep a watchful eye on tail risks such as worse-than-expected geopolitical and trade developments. We maintain Overweight positions in Asia ex-Japan and Europe equities despite their outperformance.

Eli Lee
Managing Director,
Chief Investment Strategist,
Chief Investment Office,
Bank of Singapore Limited

After some turbulence following “Liberation Day” tariff announcements, equity markets have seen a V-shaped rebound with Asia ex-Japan and European equities outperforming the rest. We continue to see 2025 as a year of decent earnings growth across global markets but keep a watchful eye on tail risks such as worse-than-expected geopolitical developments resulting in elevated energy prices and inflation, as well as slower-than-expected growth amidst trade uncertainties.

We maintain our Overweight positions in Europe and Asia ex-Japan equities. The peaking in trade uncertainty between the US and China is a positive for equities, as is a renewed focus by China on supporting the private economy, with the potential for more stimulus. The direction of the US Dollar (USD) is also a noteworthy factor for relative performance of non-US equities, and we continue to expect USD weakness ahead. Europe remains attractive over the longer term given its supportive fiscal and monetary backdrop and undemanding valuations, while our favoured regions in Asia ex-Japan (Hong Kong/China, Singapore and the Philippines) offer a good mix of growth, healthy fundamentals, defensives and undemanding valuations.

We favour a mix of quality growth and defensiveness in our sector strategy, with Overweight positions in IT, Communication Services, Utilities and Consumer Staples, and an Underweight position in Consumer Discretionary.

US – Gains driven by positive tariff and tax news

S&P 500 Index climbed to near its all-time high levels, as forward price-to-earnings (P/E) ratio and earnings forecast recovered to February and April levels respectively. In addition to better-than-feared 1Q25 earnings and guidance, de-escalation of Middle East tensions and progress in trade talks boosted sentiment as well. The US and China finalised a trade understanding and there could be imminent agreements with ten other major trading partners. A deal was also reached with G-7 allies that excludes US companies from some taxes in exchange for removing the “revenge tax” proposal in Trump’s tax bill.

Fundamental growth could recover from late - 2025 onwards, although that is somewhat priced in via an acceleration in 2026 earnings per share (EPS) growth forecast. Trump’s pro-growth policies (e.g. deregulation and tax cuts) are likely to feature more prominently, especially with the US midterm elections in 2026. Fiscal sustainability concerns would continue to drive a bearish outlook for the US Dollar and partially support earnings, although offset by any increase in long-end yields.

Europe – Near-term uncertainties, long-term potential

After a strong run since the start of the year, positioning and sentiment looks increasingly stretched in the near term, making Europe tactically overbought. These considerations, together with German stimulus news, as well as a risk of mixed headlines coming up in relation to trade negotiations with the US, are obstacles for a further run among Eurozone markets.

Over the longer term, however, Europe’s growth is poised to strengthen, driven by i) stronger fiscal and defence spending and ii) a potential end to the Russia-Ukraine war that results in lower energy prices and higher confidence, barring a significant escalation in trade tariffs and a slowdown in global growth. Coupled with rate cuts by the European Central Bank (ECB), Europe has both a supportive fiscal and monetary backdrop. Valuations remain undemanding, and we maintain our Overweight position on European equities.

We continue to favour companies that ride on the tailwinds of defence, and infrastructure spending, along with select names exposed to energy efficiency/ transition.

Japan – Riding on the waves of higher wages, AI growth and rates

Japanese equities have rebounded alongside global equity markets since the selloff from the “Liberation Day” tariff announcements. The MSCI Japan Index in USD terms did better compared to its performance in Japanese yen (JPY) terms due to the appreciation of the latter. Given the positive correlation between USDJPY and Japanese equities, we believe this could exert some downward pressure on the MSCI Japan Index, with export-oriented names being more vulnerable. On the other hand, the expected appreciation in the JPY could provide an attractive option for investors seeking to diversify from USD assets. Although we maintain our Neutral position on Japanese equities heading into 2H25, we believe investors can position in i) domestic-oriented non-manufacturers with resilient overseas operations, as supported by rising wages, ii) companies that are beneficiaries of a higher interest rate environment and iii) AI plays. Corporate reforms also appear to be gathering momentum. Examples of ongoing initiatives include enhancing shareholder returns, business restructuring and improving corporate governance.

Asia ex-Japan – Reiterating our Overweight position heading into 2H25

The MSCI Asia ex-Japan Index outperformed the MSCI ACWI Index (a measure of global equities) in 1H25, and we are maintaining our Overweight position on the former heading into 2H25. Within the region, we reiterate our Overweight positions on China, Hong Kong, Singapore and the Philippines. We like Hong Kong, Singapore and the Philippines for their earnings resilience, as their respective MSCI equity indices have seen the smallest consensus downward revisions in 2025 EPS year-to-date. For China, our current preference is for offshore equities in the near term on the back of de-escalation in Sino-US trade tensions.

We are upgrading the South Korean equities. We believe political uncertainties has been lifted with the conclusion of the presidential elections. An expansionary fiscal policy has been earmarked by new President Lee Jae Myung, while the better-than-expected recovery in memory prices also buoyed sentiment towards the South Korean stock market which is heavily weighted by semiconductor names. Net flows from foreign institutional investors to South Korean equities have been increasing, but foreign ownership is still well below historical averages. Our least preferred equity market is Thailand given increased political uncertainties and a subdued macroeconomic outlook.

China/HK – Silver lining in a bumpy market

While US-China geopolitical tensions have de-escalated, we expect trade tensions to remain a key swing factor in 2H25. The temporary rollback in tariffs could lower the urgency for Chinese policymakers to roll out additional stimulus in the upcoming July Politburo Meeting.

We remain constructive on Chinese equities on the back of near-term trade de-escalation, relatively upbeat 1Q25 results, undemanding valuations and low positioning among institutional investors. We prefer offshore Chinese equities in the near-term given a potentially slower roll out of additional stimulus. In terms of investment themes, we favour i) quality yield stocks considering the lower-for-longer interest rate environment, ii) internet and platform companies, as the latest quarterly results showed gaming to be a resilient segment, and the emergence of artificial intelligence (AI) application beneficiaries; and iii) policy beneficiaries focusing on domestic consumption and technology innovation.

We are keeping an eye out on the decline in the Hong Kong interbank offered rates (HIBOR) which has been sharper than expected. This has implications for Hong Kong stocks, especially banks and property, and companies that are highly geared.

Global Sectors - Divergence arising from sector-specific drivers

Amidst the tariff announcements, geopolitical tensions and wars, and developments relating to the US budget in 1H25, the Industrials and Financials sectors have led the pack, while Consumer Discretionary and Healthcare have lagged the rest. The Aerospace & Defence sub-sector is a major contributor to the outperformance of the Industrials sector, while the Financials sector benefitted from positive trends in loan growth and regulatory reform. The Consumer Discretionary sector has been weighed by tariff uncertainties and weaker consumer confidence, while Healthcare has been dragged by policy uncertainties, particularly around pharmaceutical tariffs, the most favoured nation policy and healthcare reforms in the US.

Tech bifurcating

Semiconductor stocks saw a significant run-up in June on the back of increasing optimism. At its Advancing AI event, AMD introduced several new products in semiconductors, software and services, and focused on its rack-scale solutions such as Helios. It also showcased several large tech partners, including Sam Altman (founder of OpenAI). Micron also reported an impressive set of results, with AI benefiting the company on multiple fronts. These developments are giving fuel to the near-term momentum for semiconductor stocks, although valuations for a number of names in the space are increasingly lofty at this juncture. On the other hand, share prices of marquee software names such as Adobe have been lagging given concerns around the pace of AI monetisation, but we believe the market might be overly pessimistic at this juncture.

Favour a mix of quality growth and defensiveness

We favour a mix of quality growth and defensiveness in our sector strategy, with Overweights in IT, Communication Services, Utilities and Consumer Staples, and an Underweight on Consumer Discretionary. We have downgraded Consumer Discretionary from Neutral to Underweight as the outlook for key sub-sectors such as autos, retail, apparel and luxury remains dim despite meaningful downward earnings revisions amidst a challenging operating environment. Overall, the global growth momentum has recently bounced back as tariff concerns have eased, amongst other factors, but this may change given the possibility changing policy or sentiment.