A combination of trade and fiscal headwinds, the likely payback from the frontloading of orders ahead of tariffs, as well as higher inflation expectations hurting real disposable incomes, will drive a weakening in the growth momentum. While “Liberation Day” might mark the peak of trade uncertainty, it is certainly not the end, given the many countries that are impacted and the tenuous path towards reaching a deal between the US and China. In the near term, we expect more market volatility in store, though we have a more constructive view over a 12-month horizon. We have upgraded European equities to Overweight while our position on US equities has been lowered to Neutral. Continued policy uncertainties in the US are increasing the attractiveness of non-US assets with Europe emerging as one of the key alternatives to turn to, especially given its more supportive fiscal and monetary backdrop and undemanding valuations. Europe is also exhibiting more leadership and esprit de corps, particularly in Germany, where the greater the external risks, the greater the potential for bold actions to produce self-reinforcing and growth positive feedback loops. Asia ex-Japan remains as our other Overweight in the equities asset class.

US – Volatility likely to persist near term

We see market volatility staying elevated, with a wider range of earnings outcome in the near term given heightened policy uncertainties. Meanwhile, price-to-earnings (P/E) multiples are likely to remain subdued given inflationary risks from tariffs and the Federal Reserve (Fed) remaining in a wait-and-see mode. Sentiment could also be further dampened by questions over Fed independence and the relative attractiveness of non-US markets.

Still, we expect a recovery starting from late-2025 onwards. Trump’s pro-growth policies (e.g. deregulation and tax cuts) could come into focus then, especially with the midterm elections in 2026. Meanwhile, the current weakness and bearish outlook for the US Dollar should also help to partially cushion some of the negative earnings revisions moving forward. Large caps’ balance sheets are also broadly healthy, which puts them in a strong position going into the trade war.

All considered, we are downgrading US equities from Overweight to Neutral.

Europe – A safer haven

Barring a significant escalation in trade tariffs and a slowdown in global growth, Europe’s growth is poised to strengthen from 2026, driven by: i) stronger fiscal and defence spending; and ii) a potential end to the Russia-Ukraine war that should result in lower energy prices and greater investor confidence. Coupled with rate cuts by the European Central Bank (ECB), Europe has both a more supportive fiscal and monetary backdrop compared to other regions such as the US. Valuations of European equities remain undemanding, and we sense that stimulus prospects, policy unity and bold ambitions remain underrated by investors.

We upgrade European equities from Neutral to Overweight. We continue to favour companies that ride on the tailwinds of defence, and infrastructure spending, along with select names exposed to energy transition. Telcos are also favoured during times of volatility and uncertainty.

Japan – Attention remains on sectoral and reciprocal tariffs

We maintain our Neutral position on Japanese equities as tariff uncertainties and the strength of the Japanese Yen (JPY) offset the sanguine outlook for domestic sectors.

Japan’s ongoing talks with the US on tariffs have raised optimism of a reduction in the 24% reciprocal tariffs imposed. However, the US has rejected Japan’s request to review the 25% sectoral tariffs on auto and steel (as of 25 April) which collectively comprise about 10% of the MSCI Japan Index’s revenue. Meanwhile, a weaker growth outlook and market instability could delay the Bank of Japan’s (BOJ) rate hikes, in turn dampening banks’ net interest margins and return on equity. Domestic-oriented sectors would be relatively more resilient with wages expected to increase by more than 3% in the Shunto wage negotiations and inbound travel. However, we are cautious that weakening of manufacturers’ sentiments, as indicated in the Reuters Tankan survey could spill over to the labour market. We favour industrial automation and robotics as a medium to longer term play on Japan’s aging demographics and fiscal stimulus from China.

Asia ex-Japan – Preference for markets with better earnings resilience

The MSCI Asia ex-Japan Index recovered much of its lost ground in April amid broad market volatility following the “Liberation Day” tariff announcements. We maintain our Overweight position on the MSCI Asia ex-Japan Index and remain more constructive on the equity markets of Hong Kong/China, Philippines and Singapore. Markets that we favour have exhibited relatively more resilient earnings trends thus far. For example, the MSCI indices of Philippines and Singapore have registered the smallest downward revisions in their 2025 consensus EPS year-to-date (YTD) in the region, by -0.7% and -0.8% respectively. On the other hand, markets that we downgraded recently have seen relatively worse EPS revisions YTD. Consensus 2025 EPS for the MSCI indices of India, Korea and Indonesia have been cut by 3.8%, 4.6% and 6.0% YTD respectively, ranking them as the three worst performing indices in terms of 2025 EPS revisions YTD within the MSCI Asia ex-Japan Index.

We are cognisant that the situation remains fluid, and developments over tariff negotiations will continue to be at the forefront of investors’ attention, while the start of the 1Q25 earnings season will be another area of focus.

China/HK – Incremental policy support

Onshore Chinese equities have been more resilient over the past month, outperforming the MSCI China Index and Hang Seng Index.

US-China geopolitical tensions have seen some improvement towards the end of April with comments from the Trump administration suggesting a de-escalation in the near term. That said, we reiterate our expectation that tariffs disputes could linger on to 3Q25 given that the 90-day pause on higher reciprocal tariff will end in July. We remain constructive on Chinese equities with a barbell strategy focusing on quality yield plays on the defensive side while also favouring the internet and platform industries as well as policy beneficiaries.

The April Politburo meeting came in-line with ours and the market’s expectation for a front-loading of announced policy support but did not highlight much additional stimulus. That said, the more proactive tone should set the stage for incremental stimulus measures going forward. Consensus is forecasting an additional CNY1-1.5t fiscal support in 2H25. Key positives from the Politburo meeting include: i) the mentioning of new structural monetary policy tools to support tech innovation, consumption and exports; ii) consumption support expansion with a stronger emphasis on service consumption; and iii) more social relief measures.

Global Sectors - Search for defensiveness

The Energy sector has had a good start to 2025, with total returns of 9% as at end-March that outperformed other sectors. In general, this strength has been led by more defensive pockets of the sector (e.g. integrated, midstream and large-cap producers), but sentiment in the sector quickly turned sour post “Liberation Day” and a larger-than-expected supply increase from OPEC+. We expect defensive sectors to continue outperforming cyclical sectors ahead, and favour value and quality stocks given the uncertainties related to tariffs and global growth.

Dealing with multiple headwinds in Technology

Over the past month, the Consumer Staples and Utilities sectors have outperformed the pack, while the Energy sector has lagged. In our view, cyclical sectors and exporters are likely to provide the most challenging forward guidance, in this earnings season. We believe investors can seek shelter in Defensive names, especially if bond yields were to resume declining.

No kitchen sinking of guidance in tech sector at this point

US tech companies have broadly posted better-than-expected prints. There remains a degree of uncertainty on the detailed impact of tariffs on the outlook ahead, but for those that have attempted to quantify, the impact appears to be milder than initially feared. For instance, TSMC’s guidance on the dilution to gross margins in the later part of its forward five-year period, due mainly to inflation and potential tariff-related cost increases, appears manageable. As it relates to the mega-caps, companies like Alphabet are posting solid search prints, and still committing to elevated levels of capex this year. In the semis space, companies such as Lam Research are not seeing significant impact from global tariffs yet. However, even if tariff pressures subsequently materialise, certain players like Texas Instruments might be better placed to weather the storm, given low customer inventory levels.

Rotating among the more defensive sectors

We have downgraded the Healthcare sector to Neutral as we expect further policy uncertainty ahead, particularly around healthcare reforms and rising pharmaceutical tariff risks. Recovery expectations for life sciences and biotech funding are likely to be pushed back further under the current macro environment.

On the other hand, we have upgraded the Utilities sector from Neutral to Overweight. With policy whipsaws and growth concerns possibly persisting under Trump 2.0 in the foreseeable future, the Utilities sector offers an attractive shelter balancing defensiveness and exposure to medium-term power demand growth driven by AI and onshoring. This helps to add defensiveness in our overall strategy, where we also have Overweight positions in Consumer Staples, Communication Services and Information Technology.