“Our latest strategic targets call for positive mid-single returns for equity markets on average until March 2026. But this implies only a mild downturn in the US and not an outright recession as a result of current policies,” he adds.
Dollar diversification is now a core theme. “Euro and yen are replacing the US dollar as portfolio diversifiers, as the US is currently the source of problems rather than their potential solution,” says Ivy Ng, Asia Pacific (Apac) CIO at DWS. The asset management company has reduced its risk stance to neutral and lowered its US GDP growth forecasts, reflecting growing concerns over recession and stagflation.
Still, selective opportunities remain. “We believe that investors are best served holding a well-diversified equity portfolio covering various regions, sectors and investment styles. For investors still being heavily overweight the US, as many have been until very recently, this means reducing US exposure. But it doesn’t mean avoiding US stocks,” says Mueller.
He highlights that “US big tech companies are still a class on their own, growing sales and profits almost independent of US economic growth”. Sectors such as healthcare and utilities also remain structurally attractive, while goods retailing and manufacturing are less preferred.
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Furthermore, interest rate trajectories are shifting across key central banks. According to Ng, “We anticipate that the rate cut cycle will continue across the Federal Reserve, European Central Bank (ECB) and Bank of England (BOE). We expect the Fed rate to decrease to 3.75%–4%, the ECB rate to 1.75%, and the BOE rate to 3.75%, by March 2026.”
In contrast, the Bank of Japan is on a divergent path with a forecasted hike to 0.75%, marking a long-overdue exit from ultra-loose policies. Japanese equities, as a result, are benefiting from low valuations and robust corporate fundamentals. “The Japanese market remains attractive due to low valuation levels, strong earnings recovery trends, solid balance sheets and expected higher share buybacks and dividend payments,” Ng adds.
In fixed income, the anticipated US rate cuts are likely to buoy Asian USD-denominated bonds. “The market has recovered approximately 70% to 80% since April 2, presenting opportunities to pick up cheap bonds,” she notes, favouring Japanese insurer subordinated debt, Indonesian and Indian credit, and Macau gaming bonds.
Pivot to Asia
Against this backdrop, investors are considering a potential shift towards Asian emerging markets (EMs), though opportunities remain uneven. “It will be challenging to see more flows into emerging markets in Asia due to the macro uncertainties and the trade discussions with the US in the short term,” says Ng. “Singapore, the Philippines, and possibly Vietnam may benefit.”
Resilient domestic sectors and a tailwind from market reforms offset Singapore’s trade dependency. Philippine property stocks could gain from rate cuts, and Vietnam may benefit from an upgrade to EM status and ongoing trade negotiations.
For Ng, Singapore and Malaysia are positioned to benefit from supply chain shifts from current trade tensions. “We believe Singapore and Malaysia might be better positioned to capture market share. Singapore is well-positioned in a multipolar world, and the Johor-Singapore Special Economic Zone (SEZ) allows more companies to take advantage of opportunities.”
In terms of resilience, DWS is constructive on Japan and selectively positive on China and India. Japan benefits from domestic reforms and governance improvements. “Besides Japan, we also favour the Chinese market within emerging markets due to tech earnings per share (EPS) upgrades and stabilising macro indicators rather than expecting a significant stimulus,” says Ng.
China is experiencing strong growth in the first quarter but faces headwinds. Ng warns that the second and third quarters are expected to see significantly lower growth. “The primary reason is the anticipated collapse of bilateral US-China trade, as indicated by the steep decline in new export orders reflected in April’s PMI,” she says, adding that overall, falling exports due to US and global demand weakness will have knock-on effects on employment and sentiment, despite fiscal and other support are underway in China.
Still, investment opportunities persist. “Chinese equities and bonds each offer distinct trade-offs. Chinese equities, while still relatively cheap compared to US markets, are currently valued near the higher end of their five-year range, reflecting improved sentiment driven by stimulus and earnings growth, particularly in technology sectors benefiting from rising innovation standards and overseas market resilience despite tariffs,” she notes. On the fixed income side, Chinese USD bonds and selected high-yield property names offer upside.
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India, while expensive, remains a key market for future capital reallocation. “The main EM market beneficiary is India, where global and US-based EM investors are most underweight,” says Ng.
Defensive tilt and sectoral convictions
The spectre of Trump-era protectionism looms large. “In less than four months, we have arguably gone from Trump Trade to Tariff Tantrum to Temporary Trade Truce,” says Mueller, noting the policy whiplash. Even with some backtracking on tariffs, the damage is visible. “We have halved our 2026 growth forecasts for the US to 1.1% and have reduced it for 2025 from 2% to 1.2%.”
While DWS expects a reduction in US tariffs on China to 35% from the current effective rate of 100%, the underlying sentiment remains fragile. “While there is a possibility of decoupling between Chinese and US markets, it is not our base case scenario,” Ng clarifies. Still, risk is building in sectors exposed to US demand, such as consumer electronics and textiles.
For investors, a more balanced portfolio is key. Domestic-facing Chinese sectors like toll roads, banking, and real estate are relatively insulated. The Chinese government is expected to expand fiscal support to offset tariff-driven slowdowns.
In volatile markets, defensiveness is the watchword. Ng notes: “Low volatility (defensive) performed very well during the March-April selloff. Performance has pulled back since, but we still favour having some defensive exposure across all markets. Export-focused businesses will be very tough with the rising trade uncertainties under Trump. We still prefer domestic demand-oriented defensive stocks.”
In Asia, preferred defensive sectors include utilities, staples, telecom, REITs and healthcare, along with financials in some countries, such as China, India, Japan and Korea.
Mueller, on the other hand, sees durable trends in AI, healthcare and clean energy. “Pharma remains a growth sector for demographic reasons and for reasons of personal lifestyle choices,” he says. Thematic investments tied to decarbonisation and resource efficiency are also gaining traction.
In the future, Asia could emerge stronger once global capital realignment takes hold. “In the short term, the market will focus on the risk factors from US tariff policy, US recession and the macro uncertainties,” says Ng. “Yet in the long run, the capital reallocation thesis could be very positive in Asia, especially if China can address its consumer confidence issues, and India can revive its private capital expenditure.”
Despite global fragmentation, DWS does not foresee a bifurcation between developed and emerging markets. But the multipolar world is here. “The US’s exceptionalism has certainly peaked,” says Mueller. Investors should prioritise diversification, not just across geographies, but also across sectoral correlations and policy exposures.
For Mueller, Trump’s policies and plans to return to protectionist trade policies are a permanent threat, causing DWS to reduce global growth forecasts due to new policies. He adds: “Despite Trump backtracking on some of his most radical tariff policies, we believe that some lasting damage has been done to the global trade fabric with direct consequences for growth.”
