Over the longer term, we maintain our Overweight positions in Asia ex-Japan and Europe equities given their more favourable risk-reward profiles. We continue to favour a mix of quality growth and defensives in our sector strategy.

Eli Lee
Chief Investment Strategist,
Bank of Singapore

After a V-shaped rebound post jitters over “Liberation Day” tariffs, US and Asia ex- Japan equity markets have continued to gain ground, especially the latter, which is currently trading at levels meaningfully higher than at the start of the year. As of the time of writing, trade deals between the US and other countries are being announced. Although the final tariff rates are lower than earlier levels, there will still be meaningful headwinds for both US and international companies via some combination of margin compression and reduced demand. In non-US developed markets such as Japan and Europe, domestically focused firms are better positioned to weather these challenges compared to those that rely heavily on exports or global supply chains. Domestically oriented companies in Europe are also better positioned to benefit from positive spillover effects from higher fiscal spending in the future.

We maintain our Overweight positions in Asia ex-Japan and Europe equities given their more favourable risk-reward profiles. The direction of the US Dollar is also a noteworthy factor for the relative performance of non-US equities, and we continue to expect US Dollar weakness over the longer term.

US – Transition to pro-growth policies and trade deals

The S&P 500 Index reached a new all-time high driven by optimism on trade deals and pro-growth policies, while hard data such as unemployment rates continued to hold up. Tariff rates on Japan and Europe were set at 15%, including the sectoral tariffs on autos which signals that Section 232 tariffs can be altered through bilateral negotiations. Although Trump threatened at least 15% reciprocal tariff rates on other countries following the 1 Aug deadline, which is higher than the universal 10% rate, investors have mostly looked past the marginally negative news.

The passing of the “One Big Beautiful Bill Act” with its tax cuts and investment incentives represents a shift in focus by the Trump administration to the pro-growth components of his political agenda as the US mid-term election nears. That said, the bill poses some headwinds for the clean energy and healthcare sectors. Fiscal sustainability concerns would continue to drive a bearish outlook for the US Dollar and partially support earnings, albeit offset by any increase in long-end yields.

Europe – Thoughtful positioning required

Europe and the US have struck a deal on trade, with a 15% tariff rate for most EU exports, along with other conditions such as investments in the US and purchases of US energy. While the deal reduces uncertainty and the risk of an escalation, it cements a marked deterioration in European firms’ export conditions to the US and will likely drive further divergence in the share price performance between goods/exporters and domestic/service providers.

On the other hand, Europe has a supportive fiscal backdrop while the European Central Bank (ECB) will likely leave its deposit rate at 2% for the rest of 2025. Equity valuations also remain undemanding. Shifting perceptions around the predictability of US economic policy have stoked a desire to diversify from US assets, and should this trend continue, European equities are one of the beneficiaries over the longer term. We maintain our Overweight position on European equities. We see positive structural tailwinds for regime change beneficiaries such as defence, infrastructure and energy efficiency/transition, while domestically focused companies are well positioned to benefit from the positive spillover effects of higher fiscal spending.

Japan – Boost from US-Japan trade deal outweighs concerns following Upper House election

Following a better-than-expected US-Japan trade deal, the MSCI Japan Index in US Dollar terms hit a new high while the index in Yen terms is hovering near its previous peak. US tariff rates on Japan were lowered from 25% to 15%, including the sectoral tariffs on autos that effectively gives Japanese automakers a relative advantage over global peers and surprised markets. Meanwhile, Japan’s Liberal Democratic Party (LDP) suffered a historic electoral setback as its coalition lost its majority in the Upper House, marking the first time its coalition lost its majority in both houses since the party’s formation. We see risks that the ruling coalition would need to cooperate with opposition parties and adopt their proposed expansionary fiscal policies e.g. consumption tax cuts, increases in social security.

We maintain our Neutral position on Japanese equities, preferring domestically oriented sectors and artificial intelligence (AI) supply chain players amid wage reflation, fiscal direction and US OBBBA that could accelerate near-term AI CAPEX. Banks could also benefit from yield curve steepening on fiscal concerns.

Asia ex-Japan – Steadfast momentum amid uncertainties

The MSCI Asia ex-Japan Index eked out a fourth consecutive month of gains in July. This has been partly supported by a quicker cadence of new trade deals being announced, with the tariff rates on exports into the US coming in mostly lower than the rates that were announced during “Liberation Day” on 2 April. One exception was the Philippines, which will incur a tariff rate of 19%, versus the 17% set in April. However, we believe renegotiations remain on the table. Clarity on the trade deals will provide Asian-based exporters a firmer basis for corporate planning and guidance to the street.

Within the region, we prefer companies with exposure to economies that are relatively more domestically oriented. We reiterate our Overweight positions on China, Hong Kong, Singapore and the Philippines. Despite some negatives on the tariffs front for the Philippines, we note that the MSCI Philippines Index has low sales exposure to the US, while declining inflation, anticipated policy rate cuts and the strengthening Peso would provide support to domestic consumption.

Thematically, capital market and corporate reforms are in focus. We believe the Singapore equities market stands to be invigorated from the various initiatives by the government.

China/HK – Lower urgency for additional stimulus

Hong Kong (HK) and Chinese equities have risen 5.5-7.4% over the past month, outperforming the broad regional market in US Dollar terms. The de-escalation of US-China geopolitical tensions, resumption of H20 chips to China, expectation of an extension in the trade truce that will expire in August, follow-up policies to address “anti-involution” and the revival of Hong Kong’s capital markets supported the outperformance.

The July Politburo Meeting signalled lower urgency to roll out additional stimulus given a solid 1H2025 GDP and expected trade truce extension, focusing instead on accelerating the implementation of existing measures. “Anti-involution” was also a major theme.

We remain constructive on HK and Chinese equities. Despite the recent re-rating, Chinese offshore equities are trading at 11.4x forward price-to-earnings (P/E), which is still an 8-9% valuation discount to the MSCI Emerging Market Index.

In the near term, Chinese equities may stay rangebound on the back of limited stimulus and a potential lacklustre 2Q2025 earnings season. The food delivery and quick commerce competition has triggered downward earnings revisions in this index-heavy industry. Any signs of peaking in subsidies by the internet and platform industry, together with a potential US-China trade resolution, and further follow up policy on “anti-involution” and continued Southbound inflows would support market performance in 2H2025.

Global Sectors - Industrials leading, Healthcare lagging

We are well past the halfway point in 2025 with the Global Industrials sector leading the pack, driven by the Aerospace and Defence (A&D) sub-sector as well as names leveraged to the energy efficiency/transition theme. On the other hand, the Global Healthcare sector has lagged, dragged by the Pharmaceuticals and Managed Healthcare sub-sectors over tariff concerns, policy headwinds and other idiosyncratic factors.

Cyclicals have been outperforming in both the US and Europe…

Cyclicals have outperformed defensives since May for both the US and Europe, and while this is part of a recovery from the earlier downward move from January to April, part of it is also due to sector-specific reasons, such as the rally in A&D names under Industrials, recovery in Materials, and challenges in the Healthcare sector which has a more defensive tilt.

… while smaller cap stocks in Europe have been in the spotlight

In Europe, smaller cap stocks have outperformed large cap stocks since March this year, but the trend is less clear for the US after an earlier outperformance of large cap stocks from the March to May period. This divergence is due to: (i) expectations of greater fiscal spending favouring more domestically exposed firms, which tend to be smaller; and (ii) large caps in the US tend to be MNCs that are more diversified, and investors could have favoured the relative stability of large caps when there were heightened concerns on geopolitical tensions and uncertainty earlier on. In non-US developed markets, we expect further divergence in the share price performance between goods/exporters and domestic/service providers.

Mixed US tech earnings season thus far

The US reporting season thus far has seen mixed results for the tech sector. Cloud and AI continue to be a tailwind for several large tech firms such as TSMC and Alphabet, while analog/industrial chip players appear to be facing lofty investor expectations as well as tariff-related uncertainties. In China, the “anti-involution” drive against excessive competition is likely to be a net positive for e-commerce and food delivery platforms, while the resumption of AI chip sales into China should bode well for marquee AI players.