2025 Asia Equity Outlook: A Periscopic View of Opportunities

• Asia’s strong economic momentum creates the potential for robust earnings growth for companies in key markets and sectors, including artificial intelligence (AI)-related technology in Taiwan and Korea and banking in India.

• China’s commitment to spurring domestic GDP creates cautious optimism for selective opportunities in domestic stocks that are supported by solid fundamentals.

• India’s pace of growth is attracting increasing foreign participation, supporting stability and capital-raising via equity markets, and offering compelling opportunities for exposure to banking and digital infrastructure.

Asia looks set to be a region of opportunity in 2025 after a year of profound global change, with equities now on a clearer path to deliver diversification and resilience across multiple geographies and sectors. This follows 12 months that saw elections for half the world's population, a shift from monetary tightening to rate cuts in many developed economies, the close of Japan's negative interest rate era, and other significant rotations in markets.

The lead-up to Asian equities’ current state of play

For investors who have managed money over multiple cycles, many would agree that the past five years were among the most challenging – not necessarily due to Covid, but more because of the need to address broad swings in market sentiment driven alternately by fear and excessive exuberance.

Looking back to 2017, when Donald Trump first took office as president of the US, the globalization of trade – hailed as the success story of Asia – began to break down. “America First” became US politicians’ focus. Over decades, globalization had helped companies to grow through cost efficiency, moving plants to regions where labor was abundant and raw materials were readily accessible, and via the logistics China built around servicing multinational corporations (MNCs). Before the Trump era, it was hard to imagine this chain being broken – and as the world moves toward greater protectionism, this disruption will likely come at a cost.

What was the genesis of globalization? Assembly of products in what were termed the “Dragons of Asia” – Korea, Taiwan, Singapore, and Hong Kong – in the 1980s was rapidly overtaken by China as it built roads and other infrastructure, leading to logistical advantages as well as cheaper labor in a directed economy. Foreign direct investment (FDI) then began to flow to China.

Fast-forward 30 years, and China had both a flourishing domestic economy and had cornered the global low-end manufacturing of commodity parts, shoes, clothing, and more; in short, China had become a seemingly indispensable part of the manufacturing food chain. In the past 10 years, China has also found its own manufacturing expertise in developing electric vehicles (EVs) and EV batteries, becoming the largest battery manufacturer in the world and enjoying a formidable 60% share of the EV auto sector.1

The battle between an existing superpower and a growing potential superpower is not likely to subside. But then again, China is not the China it was decades ago. It now has its own ecosystem, growing demographics, and a large consumer base, and it is building MNCs in its own right. Technology and knowledge are exclusive: China is also creating its own “Silicon Valley,” developing products both for domestic industry and for global distribution.

Select opportunities in China

As the world digests Trump’s return to office and the potential changes in tax regimes that would affect companies exporting to the US, many strategists have called China “uninvestable” − an easy decision when considering only the “fear factor” and potential ramifications for China’s economy. Indeed, over the past five years China has faced challenges from oversupply in many industries and its property market woes, culminating in the collapse of heavily debt-burdened property companies, decimating consumer confidence. Nevertheless, there are still good companies in the midst of the broader decline, and these companies continue to gain market share both locally and overseas.

The misconception for investors is that being invested in China means investing in MSCI China – and that the global pressures on China imply that there are no alpha-generating opportunities available. We see it quite differently. Our focus is on bottom-up stock selection, as we believe the macroeconomic impact of potential policies is harder to predict than the workings of individual corporations, which are illustrated by their track records for execution and results over the years.

Chinese companies have shown the ability to innovate, cut costs, and sustain margins, and not only in the low-end manufacturing part of the chain that has developed over decades. As labor costs in China keep rising, the move to cheaper nations is inevitable. Changes in the tax regime have only accelerated the movement of investments to countries such as Vietnam, Cambodia, and (to a lesser extent) Thailand and Bangladesh.

Many Chinese companies are MNCs in their own right and will likely develop bases overseas and continue to grow, despite potential tariffs. These companies have gained market share over the years through cost-cutting and improvements in product quality to compete with global peers. China’s share of global manufactured exports was 20% in 2020, up from 3% in 1995.2

The key as an investor is to assess how a company can position itself in the changing environment and pass on potential cost increases. Examples include a grid component manufacturer in China that is gaining share overseas and a humanoid robot and mechanical engineering company serving global EV manufacturers – and Chinese smartphones have of course successfully penetrated both emerging and developed markets.

In short, we are cautiously optimistic and see selective opportunities and continued competitive valuations in China – but company fundamentals count for investors seeking opportunities through a bottom-up approach.

AI to lead in Taiwan and Korea

Amid the AI hype in 2023, valuations of AI-related stocks ran ahead of earnings delivery, leading to a correction for some in 2024. Between Taiwan’s and Korea’s technology sectors, we tend to favor Taiwanese companies, which we view as more nimble and able to provide AI solutions to their customers. We prefer AI server component suppliers and leading ASIC IP providers within the AI space. Non-AI tech demand remains muted despite lean inventory. However, a potential replacement cycle and spec upgrade could drive demand recovery for select PC supply chain companies.

ASEAN stocks, though perceived as defensive plays, are not especially cheap, and with a stronger US dollar, emerging Asia currencies could face currency risks. This, coupled with weak loan growth, is a concern for ASEAN companies.

India’s promising investment picture

Amid global uncertainty and widespread risk-off sentiment, India has stood out as a bright spot over the past five years.

We are witnessing a monumental transformation in the country’s economic landscape. Newer technologies are experiencing explosive growth, while many traditional ones are faltering. Unprecedented business opportunities are emerging, driven by widespread adoption of public digital infrastructure – a suite of government-launched services designed to streamline access to the digital ecosystem.

With IPOs and follow-on offers continuing unabated, companies with promising prospects are raising capital at remarkably low costs, making their ventures highly viable. Although market valuations appear steep overall, granular investment opportunities are abundant thanks to the dynamic changes on the ground.

Other tailwinds include the impact of US efforts to reshore manufacturing, which may allow Indian companies to establish a presence there and unlock a new area of growth. Bank credit growth in India, which had decelerated in recent months, has now turned around and is showing signs of acceleration. Foreign investor withdrawals have stabilized, while domestic investors have continued investing. Global energy prices are relatively stable, providing margin stability to companies. The recent volatility in the markets, along with a very strong pipeline of IPOs, should provide ample opportunities to deploy capital.

We remain focused on India’s banking sector, which we believe is set to benefit from a promising economic picture in 2025. After several tough years before the pandemic, when bad loans impaired balance sheets, the banks have recovered dramatically, with a rise in cumulative profits boosting banks’ equity capital base. Banks are also attractive from a valuation perspective. While average Indian equity valuations remain high, the large-cap banking sector is trading at competitive valuations relative to peers. This sharpens our focus on active management, selecting from higher-quality options within a broadly expensive market.

While we expect cyclicality in earnings growth, the volatility in stock prices is providing more opportunities to deploy capital in reasonably priced stocks than over the past year, when good opportunities had become scarce.

Looking past volatility in 2025

We believe volatility will be here to stay in 2025. The new US president inherits a booming US economy, and tariffs on US imports, large-scale deportations of immigrants, and tax cuts for the wealthy could risk a resurgence of inflation and keep interest rates elevated. The winners and losers from tariffs will be an ongoing question, and tariffs could be used as a bargaining chip for negotiation. It is not so easy to untangle supply chains built over many years, and even if it is done in slow motion, the increased costs will fall to the end consumer. So ultimately, who wins?

We believe the outlook for 2025 is still marked by uncertainty, and that there won’t be a dull day in investing. But at PineBridge, such uncertainty can be an asset; through our Lifecycle Categorization Research process, we are continually searching for the overlooked acorn that will turn into an oak tree – regardless of current politics or macro conditions.

Investing in this way is akin to peering through the lens of a periscope – looking beyond one’s immediate landscape to what lies in the distance. In practice, this means working with companies’ management, considering their management styles, and riding through volatility with an eye to longer-term sustainable growth – and investing in these names when panic selling drives good and bad stocks down at the same time.