Navigating global headwinds and capital shifts in Asia Pacific

Business Times

9 hours ago

AS WE approach the second half of 2025, the investment landscape is facing a series of challenges and opportunities driven by global economic shifts, geopolitical tensions and structural changes.
For investors in Asia Pacific, navigating this evolving environment requires a nuanced approach, balancing caution with strategic positioning to capitalise on selective opportunities.
The global economy is grappling with headwinds, including a potential US economic slowdown, weakening Chinese growth and persistent geopolitical tensions. Amid these challenges, monetary easing is likely, with the Federal Reserve expected to cut rates to the 3.25 to 3.5 per cent range by June 2026. While this may provide some relief, it also highlights broader concerns about the strength of the US recovery and global demand.
Where we see opportunities
In light of these uncertainties, we have adopted a neutral risk stance across our portfolios. While regional equities present occasional trading opportunities driven by extremes in risk-reward or positive developments, we are cautious overall. US equity valuations remain high, and the risks of recession or stagflation could lead to prolonged market corrections. As a result, we maintain an overweight position in European equities, and focus on sectors with stronger defensive characteristics like global healthcare.
Our sector strategy reflects the current macroeconomic environment. For the US, we are underweight in consumer sectors, industrials and materials due to concerns over an economic slowdown. Conversely, we are overweight in healthcare, financials and utilities, which offer relative stability. Recent additions have brought us to an overweight position in communication services, information technology and energy.
From a currency perspective, the euro and yen are increasingly favoured as portfolio diversifiers, replacing the US dollar. The euro, in particular, benefits from sound fundamentals and attractive yields in investment-grade bonds, which we continue to favour despite tight spreads.
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China's slowing growth and rising risks
China's economy, despite a strong start to the year with Q1 GDP growth of 5.4 per cent, faces significant challenges ahead. Growth projections for Q2 and Q3 have been revised down to 4 per cent and below, largely driven by the anticipated collapse of US-China trade and weakening global demand. The steep decline in new export orders, reflected in April's PMI, signals ongoing headwinds for China's export-oriented industries, including consumer electronics, tech hardware and apparel.
These pressures are expected to weigh on employment and domestic sentiment, with additional risks stemming from rising geopolitical tensions and policy uncertainties. While we anticipate some easing of US tariffs, not all the damage to China's economy can be reversed.
Domestically oriented sectors, such as toll roads, banks and real estate, may appear more resilient but are not immune to the broader slowdown. Chinese banks and property developers face mounting challenges, and while stimulus measures may offer limited reprieve, structural issues persist.
Strategic repositioning in Asia
Amid these challenges, certain markets in Apac stand out for their resilience and potential. Japan remains our highest conviction market, benefiting from low valuations, strong earnings recovery trends and higher share buybacks. The moderate rate-hike expectations in Japan have lifted a significant overhang, making its market more attractive. Subordinated debt from Japanese insurers, alongside Indonesian and Indian credit, offers compelling opportunities due to strong domestic fundamentals.
Singapore and Malaysia are well-positioned to gain market share, while Thailand could benefit from potential deals. Singapore stands out with its unique economic zone with Johor, offering leverage in a multipolar world. Meanwhile, Indonesia faces challenges from external headwinds and domestic policy uncertainty.
For equities, we favour domestic demand-oriented defensives such as utilities, staples, telecoms, Reits and healthcare in China, India, Japan and Korea. These sectors have demonstrated resilience during recent market volatility and offer protection against ongoing trade frictions. On the other hand, export-focused businesses face significant challenges due to rising trade uncertainties.
In China, high-quality tech names with solid capital discipline present selective opportunities despite valuations near the higher end of their five-year range. The Chinese bond market also offers appeal, particularly USD-denominated bonds, which have outperformed in recent months. High-yield opportunities in Chinese properties remain attractive, as surviving names typically have proven access to capital markets and loans. However, investment-grade names in China are relatively expensive.
Capital flow dynamics in Apac
Two major trends are shaping the broader capital flow picture: the repatriation of emerging market (EM) capital from the US and the eventual return of US capital to global markets, particularly EMs. While the latter is expected to be a multi-year process, the repatriation of EM capital is already benefiting markets like Korea, which has significant ownership of US equities. India, meanwhile, is well-positioned to attract fresh diversification flows from the US, where it remains under-owned.
Other markets in Asia, such as Singapore, the Philippines, and Vietnam, also stand to benefit. Singapore's trade-dependent economy is supported by market reforms, and its stocks often outperform during bear markets. Rate-sensitive real estate stocks, particularly Singapore-focused Reits, could gain from defensible domestic income streams.
The Philippines, with its domestic consumption-driven economy and strengthening peso, is relatively well-positioned for a global trade slowdown. Vietnam, while facing complexities, could see catalysts for inflows through ongoing trade talks, a potential deal, and an upgrade from frontier to EM status.
Asia in 2025: opportunity or risk?
In the short term, market attention will remain focused on the risks posed by US tariff policy, a potential US recession and ongoing macroeconomic uncertainties. These factors contribute to a cautious sentiment among investors who are closely monitoring the evolving geopolitical landscape and its impact on global trade. The interplay between these elements will likely dictate market movements and investor confidence in the near future.
However, the long-term outlook for Asia is more optimistic, as capital reallocation trends take shape. The region's economic resilience and growth potential are underpinned by several key factors. First, China's ability to address consumer confidence issues will play a pivotal role in sustaining its economic momentum. Measures to boost domestic consumption and stabilise the housing market are expected to be critical in this regard.
Second, India's revival of private capital expenditure is expected to drive significant economic growth. The government's focus on infrastructure development and policy reforms aimed at improving the business environment are likely to attract both domestic and foreign investments.
For investors, this underscores the importance of a selective and adaptable approach to navigating the region's evolving landscape. Identifying sectors and companies that are well-positioned to benefit from these macroeconomic trends will be crucial. Additionally, understanding the unique challenges and opportunities within each market will enable investors to make informed decisions and optimise their portfolios.
Apac's investment landscape is undeniably complex, shaped by global headwinds, structural shifts and regional dynamics. While challenges persist, there are selective opportunities for investors who can navigate this environment with a strategic and flexible approach.
The writer is chief investment officer Apac, DWS