As 2025 begins, Asian equities markets are at a crossroads, shaped by a mix of geopolitical uncertainties, technological transitions and evolving economic dynamics. Tom Clough, fund manager for Asian equities at Schroders, believes that while challenges persist, there are compelling opportunities for disciplined investors to generate strong returns.
Reflecting on 2024, Clough notes that Taiwan emerged as a leader in the region for the second year in a row, propelled by investments tied to artificial intelligence (AI) that drove earnings growth.
Meanwhile, India experienced a challenging year. “India started strongly but suffered setbacks including the Bharatiya Janata Party (BJP) not securing a majority, seeing a cyclical slowdown and excessive equity issuance,” he adds.
China faced difficulties for much of the year, grappling with deflationary fears and ongoing adjustments in the property market. However, Clough points out that late September brought significant relief through “joint monetary and fiscal stimulus”, sparking a rally in Chinese equities.
Looking ahead, one of the defining issues for 2025 is the return of Donald Trump to the US presidency.
On Trump’s second administration, Clough writes: “Tariffs and a stronger US dollar will likely impact Asia through higher for longer US rates, leading to tighter liquidity situations in current account deficit markets.”
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These conditions will pose particular challenges for China, which he identifies as “most at risk given the fractured geopolitical landscape.” In response, China is expected to rely on further fiscal and monetary measures to stabilise its economy and address critical issues such as consumer confidence, deflationary pressures, and the property sector.
Another critical factor is the sustainability of AI-related investments. Clough observes that many Asian technology stocks are currently trading at record highs despite a lack of clarity on how cloud service providers will monetise consumer adoption of AI.
He writes: “Given the enormous capital outlay on AI, we believe 2025 will be the year when markets question the sustainability of heavy capex spending without sufficient returns.”
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India, which was a key performing market earlier in 2024, now faces a mixed outlook for 2025.
While he does not anticipate a prolonged slowdown, recent earnings and macroeconomic data show signs of slower growth, compounded by disruptions from weather and political developments. “The significant issuance of equity and likely deployment into the market will mean returns are likely to come down in select sectors, potentially leading to lower equity returns,” says Clough.
Despite these challenges, the fund manager highlights several areas where he sees significant investment potential in Asian equities.
“We continue to see Asia equities as an attractive asset class for investors in 2025 and believe the above themes can be navigated through strong bottom-up stock picking in quality companies.”
He points to private sector banks as particularly attractive, thanks to “excellent deposit profiles” and their ability to benefit from a “tighter monetary policy backdrop”.
Clough continues: “We’d particularly call out private Indian banks that haven’t underwritten troublesome unsecured loans, Singapore banks that benefit from world-class institutional frameworks, as well as select pan-Asia banks that have been through a long period of de-risking their balance sheets and continue to trade at cheap multiples.”
Unloved Hong Kong stocks are another area where Clough observes select “world-class operators” seeing increasingly positive capital return policies, which he believes would improve their “depressed valuations".
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“Moreover, select technology stocks in Mainland China where market share has been consolidated to either monopolistic or duopolistic structures. We’d specifically call out gaming, music content and online travel.”
Finally, on yields, Clough believes with greater geopolitical uncertainty comes a greater focus on capital return.
He writes: “Dividend payout ratios are very closely linked to better corporate governance in Asia and we believe those companies which are moving to rewarding shareholders with higher payout ratios will potentially perform well in 2025.”
“More than ever, we think 2025 will be a year which rewards investors who are disciplined and focused on fundamentals and bottom-up stock picking,” concludes the fund manager.
