Within equities, we continue to see positive risk-reward in European and Asia ex-Japan equities given valuations and fundamentals. In particular, we remain constructive on Hong Kong and China equities and believe that the year-to-date rally has further legs.

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

Global equities have performed well so far this year, with the MSCI All Country World Index up about 13% YTD as of 26 Aug 2025. The performances of non-US equity regions have also been further boosted by the weaker US Dollar. Many central banks have already been cutting rates in 2025 and the Fed could follow suit soon. This reflects a broader shift towards supporting growth and should contribute to improved sentiment. Liquidity is also helping to drive China’s A-share market where a re-rating is taking place especially in the Healthcare, Materials, Financials and Technology sectors. Currently, valuations of the CSI 300 Index and MSCI China Index are still meaningfully below their historical peaks.

We maintain our Overweight positions in Asia ex-Japan and Europe equities given their more favourable risk-reward profiles, but caution that downside risks remain amid ongoing geopolitical tensions and uncertainties relating to earnings growth due to the impact of tariffs.

US – Constructive earnings and hopes of rate cut trump tariff fears

The S&P 500 Index hit another new high in August as tariff impact fears largely eased with a relatively sanguine set of 2Q2025 earnings and guidance. Importantly, the mega-cap Technology companies continued to deliver exceptional growth and beat consensus forecasts significantly, while CAPEX by hyperscalers remained upbeat. Generally, earnings strength was broad-based with the S&P 500 companies’ profit margins more resilient to tariffs than feared, with a weaker US Dollar providing additional tailwinds. Management guidance was positive with a significantly higher percentage raising their full year earnings guidance than in 1Q2025.

Rising hopes of Fed rate cuts also fuelled animal spirits, particularly after a dovish speech by Fed Chairman Jerome Powell at Jackson Hole. Looking ahead, the pro-growth “One Big Beautiful Bill Act” (OBBBA) would provide some tailwinds, especially to the companies’ free cash flows.

Europe – Enduring potential amid episodic uncertainties

We had pointed out some obstacles for a further Eurozone run, such as German stimulus news as well as mixed headlines in relation to trade negotiations. Tariff uncertainty is now lower but French political uncertainty has come to the fore again. Working through these risks and the current mixed European reporting season would be hurdles to clear before equities can start performing again.

Over the longer term, Europe has a supportive fiscal backdrop while the European Central Bank (ECB) will leave its deposit rate at 2% for the rest of 2025. Equity valuations also remain undemanding with the MSCI Europe Index trading at about 15x forward price-to-earnings (P/E), slightly above its 10Y historical average. 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 in general are well-positioned to benefit from the positive spillover effects of higher fiscal spending.

Japan – Softening earnings as expected

During the 1QFY2025 earnings season, revenue and earnings year-on-year (YoY) declines were broadly in-line with consensus expectations mainly on the back of tariff impact and Japanese Yen (JPY) appreciation. Despite uncertainties relating to US tariffs gradually easing, potential risks regarding the impact of tariffs on companies and the economy cannot be ignored. We will look for further evidence of a bottoming in earnings forecasts in the upcoming 1HFY2025 results.

Japanese equities have been resilient with the MSCI Japan Index rising 4% last month on the back of ongoing capital inflows and easing concerns relating to tariffs. The MSCI Japan Index is trading at 16.1x forward P/E, which is close to +1 standard deviation above the historical average. From a medium-term perspective, positive catalysts entail increasing inflation expectation and ongoing corporate reforms.

We maintain our Neutral position on Japanese equities.

Asia ex-Japan – Favourable trajectory but risk of an air pocket

Improved policy clarity from trade agreements, potential monetary policy accommodation and solid fundamentals support our positive view on Asia ex-Japan equities. Lower US short-term rates and a weaker US Dollar are historically associated with positive Asian equity performance, with studies indicating that South Korea, Philippines, Taiwan and Hong Kong show the most favourable sensitivity to these factors, while Thailand, China A-shares and Indonesia have the lowest sensitivity. By sector, capital goods, chemicals, transportation, healthcare and property tend to outperform energy, retail, mining, banks and utilities.

We maintain our Overweight position on Asia ex-Japan equities, and within the region, we reiterate our Overweight positions on China, Hong Kong, Singapore and the Philippines. That said, the MSCI Asia ex-Japan Index has already delivered stellar total returns year-to-date, and we are also entering the seasonally weaker period for Asian equities. Nevertheless, investors can subsequently look forward to some potentially positive events in 4Q25, including China’s 15th 5-year plan and South Korea’s corporate governance legislation. Our least preferred equity market is Thailand given continued political uncertainties and a subdued macroeconomic outlook amidst muted tourist arrivals and a potential reversal of some of its front-loading of exports.

China/HK – Earnings revision momentum in focus

Chinese equities have risen 5-8% last month, outperforming the broad regional market by 3-6 percentage points in US Dollar terms. Improving retail investor sentiment and liquidity conditions, incremental rotation to equities allocation, and incremental policy delivery are the likely forces driving the diverging trend between a softening macro and the liquidity-driven onshore A-share market rebound.

Earnings revision momentum is one of the key indicators to monitor. The MSCI China Index may continue to see downward earnings revisions in the near term due to stronger- and longer-than expected food delivery and quick e-commerce competition. From a medium- and long-term perspective, incremental policy delivery and potential policy support with the Fourth Plenum approaching would be positive catalysts.

We remain constructive on HK and Chinese equities. Despite the recent re-rating, the MSCI China Index is trading at 11.9x forward P/E and is still at a 7-8% valuation discount to the MSCI Emerging Market Index. The onshore CSI 300 Index is trading at 13.9x forward P/E, which is +1.25 standard deviations above the historical average. While valuations could overshoot by close to +2 standard deviations, in a liquidity-driven rally, a key indicator to watch for potential regulatory intervention is the margin financing balance as a percentage of the free-float market cap.

Global Sectors - Technology stocks powering ahead

Technology stocks have gained ground lately with the MSCI ACWI Communication Services Index, in which heavyweights Meta and Alphabet constitute about 50% of the index weight, becoming the leading sector so far this year. The AI super trend continues to be a major driver for the US Internet space. AI-driven demand is accelerating growth across all major cloud providers, with overall industry growth reaching 27% YoY in 2Q25, which is the fastest pace since 4Q22. Despite some near-term margin pressure, a rebound over the medium term seems likely as new capacity comes online and silicon efficiency improves. Within the US Internet space, we prefer the cloud subsegment, followed by advertising, e-commerce, travel and finally ride hailing/food delivery.

Value emerging in certain Healthcare subsectors

In comparison, the Healthcare sector continues to be the underperformer due to tariff concerns, policy reform and idiosyncratic factors impacting certain sub-sectors. Managed Care, for instance, has been rocked by major missteps and policy headwinds, but sentiment may pick up alongside entry from high profile investors. There are clear impediments to the fundamental outlook but factors such as 1) declining insurance membership and 2) higher costs and utilisation are largely known “knowns”. Any improvement in policy, judicial overhang, and a rightsizing of medical outlays to premiums could put the industry back into growth mode. We expect volatility to persist, but there are opportunities for patient investors.

Style tilt: Smaller caps performing in selected international markets

After small caps’ prolonged poor performance in 2024, the group is showing some life in certain areas this year, especially in the Eurozone and Japan. International small caps are more shielded versus large caps with respect to adverse tariff impacts, and small caps are a relative beneficiary if the US Dollar resumes its weakening. This is because international small caps are traditionally more domestically oriented compared to large caps which tend to have a greater exporting share. That said, investors are advised to be selective, as the emergence of risks such as French political uncertainty may impact French domestically exposed stocks more than those with a larger international footprint. In the US, small caps may begin to trade better should there be more aggressive Fed easing. They are also typically supported by increased corporate activity, as they tend to be M&A targets. Other potential supports include the positive impact of the Trump’s recent tax bill, as certain provisions could offer meaningful cashflow support to smaller companies.