Global equities continued to power on in September. Boosted by the weaker US Dollar (USD), the MSCI Asia ex-Japan Index and the MSCI Europe Index have outperformed indices of other major regions significantly in US Dollar (USD) terms on a year-to-date (YTD) basis, as of 26 September’s closing prices. Considering that the MSCI Europe Index is up about 23% in USD terms and more European-centric risks are coming to the fore such that the risk-reward profile is now less compelling, we are downgrading European equities to Neutral.

Globally, however, the backdrop for equities remains relatively benign with a broad-based easing cycle by central banks. This reflects a broader shift towards supporting growth and should contribute to improved sentiment. On the other hand, the Bank of Japan (BOJ) is raising interest rates and selling its ETF holdings as well.

We maintain our Overweight position in Asia ex-Japan equities given the region’s more favourable risk-reward profile, but caution that downside risks remain amid ongoing geopolitical tensions and uncertainties relating to earnings growth due to the impact of tariffs. Rate cuts by the US Federal Reserve (Fed) would result in easing of financial and liquidity conditions. This along with a weakening USD benefits Asia ex-Japan equities.

US – Resumption of rate cuts buoy sentiment

The S&P 500 Index notched another new high in September as the Fed resumed its “risk management” rate cutting cycle which is typically supportive of equities amid continued economic growth. The weaker USD and the implementation of the pro-growth “One Big Beautiful Bill Act” (OBBBA) would also provide some tailwinds, especially to companies’ free cash flows. Although valuations are elevated, we think there could be room in the near term for further expansion due to looser financial conditions from rate cuts.

However, we maintain an overall Neutral positioning on US equities as we think that unlike most of the past rate cut episodes, long-end yields are likely to stay elevated due to fiscal and Fed independence concerns. As such, equities are likely to receive a more limited valuation boost. On the other hand, further upside from earnings revision has a high bar to clear given the more than 13% consensus EPS growth forecast for 2026. Finally, markets are pricing in more aggressive Fed rate cuts into 2026 than the official projection – there is a risk of expectations being dialled back.

Despite our reservations, we acknowledge that valuations could overshoot further on buoyant sentiment and supportive liquidity conditions.

Europe – Downgrade to Neutral as more risks come to the fore

European equities have performed well YTD, with the MSCI Europe Index up close to 10% in local currency terms and 24% in USD terms. At the same time, more risks are coming to the fore. Given the less compelling risk-reward profile, we downgrade European equities to Neutral. Whether it is uncertainty over the French government or budget concerns in other key economies, or the rise of populist issues such as immigration, Europe’s attention is drawn away from what otherwise would be focused efforts to become more globally competitive.

There is also risk of higher taxes which would impact sentiment. Although tariff uncertainty has decreased, it will take time to see the effects on margins, pricing or volumes (or all three) for various European exporters to the US, as well as the implications of these new costs on US consumers. Finally, Europe needs to deliver on its investment promises of re-militarisation and re-industrialisation in which much of the government support embeds a “local sourcing” requirement. Such constraints may lead to timing issues and capacity constraints as the domestic supply chain grows.

Japan – Maintain neutral stance

In the near term, we believe Japan’s equity markets may be supported by structural reforms, under Sanae Takaichi, if she becomes Japan’s first female prime minister, Takaichi is known to be fiscally expansionist, and her pro-stimulus stance may have an impact on the economy and Japanese markets. She has said that she will ensure her active fiscal policy is “responsible” as she looks to boost growth. She has also called for monetary policy to stay easy, saying the BOJ shouldn’t raise interest rates.

While Takaichi’s “responsible proactive fiscal policy” augurs well for Japanese equities, there is uncertainty regarding the potential scale of her fiscal policy, and the size of the supplementary budget that commences this month is worth monitoring.

As long-time political party, Komeito, has pulled out of LDP coalition, this to some extent may suggest that some of Takaichi’s policies may have to be watered down or there is greater risk that policies may not be passed smoothly in parliament. The political uncertainty at the moment and absence of more forceful jawboning from Ministry of Finance officials, alongside fluid US-China developments means the situation needs to be monitored.

While we expect Japan’s equity market to be supported in the near-term, the valuation of the MSCI Japan Index is at the high-end of is historical range. At 15.7x, the forward price-to-earnings (P/E) is nearly one standard deviation above the historical average.

In the near term, we expect defence, nuclear power, AI and semiconductors to outperform while banks may see near-term headwinds. With the interim result season approaching, we will monitor data to confirm if the impact of tariffs has been factored in and earnings forecasts have bottomed out.

Asia ex-Japan – Backed by positive tailwinds

Although MSCI Asia ex-Japan equities have outperformed other key regions by a significant degree YTD, we continue to maintain our Overweight position on the region, with a favourable backdrop backed by several tailwinds.

The likely series of Fed rate cuts would result in easing financial and liquidity conditions as well as a weakening of the USD. These have historically benefitted Asia ex-Japan equities, and it comes at a time when several Asian and major Developed Markets central banks (with the exception of the BOJ) are poised to ease further. A more aggressive fiscal policy stance across Asia is also likely to support growth. That said, there are idiosyncratic factors that we need to be mindful of which could result in near-term volatility, such as the recent political uncertainties and social unrests that we have seen in certain key markets of Indonesia and Thailand.

Within Asia ex-Japan, we maintain our preference for China, Hong Kong, Singapore and the Philippines, while keeping to our Underweight stance for Thai equities. Notwithstanding recent uncertainties in Indonesia, we see these pressures broadly balanced out against attractive valuations, pro-growth measures and Bank of Indonesia’s (BI) role in supporting growth.

China/HK – Riding on the AI investment spree

China’s financial regulators emphasised on balancing financial stability and growth support and signalled no short-term policy change at a recent press conference. Hence, the upcoming Fourth Plenum meeting could shed more light on the 15th Five-Year Plan which generally focuses on structural reforms.

Hong Kong and offshore China equities had another strong month in September. Within China equities, Communication Services, Consumer Discrepancies and IT sectors led the performance riding on the artificial intelligence (AI) theme. Alibaba Group announced it will increase its global data centres capacity by 10x by 2032 to support the evolving artificial superintelligence (ASI) era and hence, its commitment to AI investment, lifting sentiment across the China AI space.

The recent sharp run up of the Hang Seng Index (HSI) has pushed valuation to the higher end of the trading range of 11.5x forward P/E, which is at +1.25 standard deviations above the historical average. While we believe the market could consolidate in the near term, we remain constructive over the medium-term considering earnings stabilisation and supportive external factors, such as the Fed rate cut cycle and a less imminent US-China trade tension escalation.

Global Sectors - Technology stocks powering ahead

The AI theme has garnered widespread attention for some time, but it is the memory-related stocks that have been on a tear recently. Over the course of the last few months, memory suppliers’ capacity allocation has been shifting from commodity memory to HBM, given the AI boom. Despite that, we have recently seen hyperscalers increasing their capital allocation towards general servers (versus AI servers), which could compound the ongoing commodity memory supply shortage and drive prices upwards.

AI is not just about Tech

The IT and Communication Services sectors are obvious beneficiaries of the AI wave, but there are names in other sectors poised to gain significantly as well. These include the Industrials sector which consists of electrical equipment suppliers and firms involved in improving energy efficiency, as well as heating, ventilation and air-conditioning original equipment manufacturers (OEM) which are required for data centres. AI will also drive the need for more power and requires clean, reliable power urgently. This could mean an inflection point in power demand and a power price tailwind for utility companies, especially better pricing power for renewable developers in power purchase agreements. Nuclear is well suited for providing a clean baseload power and innovation, especially in small modular reactors as they unlock a new growth phase after years of underinvestment.

Factor performances in key regions driven by idiosyncratic factors

Following a nine-month pause in rate cuts, the Fed resumed monetary easing with the recent 25bps rate cut. According to historical data, large cap growth stocks tend to be the biggest beneficiaries of Fed easing. In the US, large caps are increasingly dominated by Big Tech firms, and the strong influence of the AI theme is likely to support the large cap segment to a greater extent. Growth stocks in Asia ex-Japan have also been outperforming YTD, compared to value stocks, driven by region-specific expectations for politically led industrial policies. In terms of sector preferences, in addition to Technology (names in Communication Services and IT), we continue to like Utilities and Consumer Staples. We note that Utilities, Consumer Staples and Communication Services tend to be the first sectors positively impacted post the first Fed rate cut.