Asia Mid-year Outlook

However, inflation is not a concern, with disinflationary pressures anticipated due to weaker oil prices and stronger Asian currencies. The weakening US dollar offers a silver lining, easing financial conditions and paving the way for more aggressive monetary easing across Asia. This could offset the growth drag, particularly for economies with stronger domestic demand like India. 

China's economic outlook shows signs of stabilization. The drag from the property sector is easing and household consumption is showing stable growth. The manufacturing sector is rapidly adopting new technologies, supported by breakthroughs like DeepSeek, which enhance efficiency and customization. Policy support remains proactive, with measures to stabilize growth and improve business sentiment. However, trade tensions pose risks, with high tariffs potentially slowing overall trade. 

Across the region, Japan faces external headwinds but maintains resilient domestic demand, supported by strong wage growth and its role in the AI supply chain. Inflation and bond yields are rising, driven by structural changes, with higher yields expected as part of interest rate normalization. Japanese equities are attractive due to corporate reforms and low foreign participation, with potential for higher allocations. Meanwhile, the semiconductor sector faces challenges from DeepSeek's launch, which has led to valuation de-rating, yet AI demand remains robust, supporting select Asian semiconductor companies. India continues to show growth momentum, supported by structural tailwinds and proactive monetary easing, with promising earnings growth in equities. Vietnam, however, faces challenges as a "China +1" strategy destination amid volatile tariffs, with high U.S. dependency exposing it to trade war risks. Overall investors remain cautious, delaying a risk-on stance due to global uncertainties, yet attractive valuations offer selective opportunities across the region.

Please read below for a deeper dive into the key economies and themes shaping the Asia Outlook over the rest of 2025.

China – Is the recovery here yet?

Despite the rise in trade tensions in recent months, China’s economic outlook has actually seen some improvement. The main reason is that domestic demand is showing early signs of a recovery, driven by several factors, which we detail herein.

Property stabilization

Firstly, the fading drag from the property sector. After three years of rapid contraction, housing sector activity has broadly stabilized at a low level. As a result, the drag this sector poses to the overall economy is easing. A reduced drag from the property sector could be an encouraging sign for household consumption. Since the housing bubble burst, we have noted that Chinese households have accumulated significant savings—presumably because home purchase plans were put on hold and consumer sentiment remained weak. As sentiment slowly recovers there are now some tentative signs that households are channeling a small amount of this money into discretionary consumption.

Manufacturing and AI

The second pillar of support for domestic demand comes from the industrial sector. Over the last few years, the manufacturing sector has been rapidly adopting and upgrading to new technologies. Notable sectors include specialized machinery, autos and electric vehicles (EV), electrical machinery, and communication equipment. The DeepSeek breakthrough could further accelerate this process by helping to make manufacturing more customized and efficient. The dramatic cost reductions and commoditization of large language models could also bring forward more applications and unlock areas of emerging consumer demand for AI-related functionalities.

Policy support

The third and final pillar benefitting domestic demand is policy support. Both monetary and fiscal policies have shifted to a more proactive stance since September 2024. Numerous policies, including liquidity support for the equity market, loan support for property developers, debt relief for local governments, targeted support for consumption, and President Xi’s private sector enterprise symposium, have helped generate a turnaround in business sentiment. Although we do not expect a bazooka of policy stimulus, we believe policymakers have sufficient policy ammunition to provide a stable runway for economic growth. We anticipate further fiscal-related support may be announced in the summer or later in the year, specifically focused on expanding household income support (e.g., child subsidies) as well as vouchers for durable goods consumption, potentially also expanding to service sectors like catering. These three pillars are driving up domestic demand, and the economic outlook has improved from a fundamental perspective.

Trade and geopolitics

There are still headwinds and risks, with one of the biggest being trade.  After a rapid escalation in April, the U.S. tariff rate on China has been adjusted, with the base rate now at 30% (comprising 20% for fentanyl and a 10% baseline). However, due to existing 301 tariffs on various goods, the effective rate can range between 37.5% and 55%, and can be as high as 130% for electric vehicles (EVs). We expect overall exports could still hold up in the next few months, partly boosted by front-loading activity before uncertainty resurfaces as the 90-day truce expires. Over the medium term, a 50% tariff rate is high enough to cause a further meaningful slowdown in bilateral trade. We think the export sector (particularly those with heavy U.S. exposure) is likely to face challenges that amount to a drag on exports and overall economic growth. Beyond that, a significant risk overhang is U.S.-China relations. The trade truce reached in Geneva has been a positive surprise, but doubts persist given the fragility of the bilateral relationship. Recent discussions in London have added a new dimension, with the U.S. agreeing to loosen some of its export controls in exchange for China expediting licenses for the export of rare earths. We are also monitoring the risks of further broadening tensions to technology or the financial sector.

China equities

Chinese equities are benefiting from a more stable macro and earnings outlook. Takeaways from the J.P. Morgan China Summit in Shanghai suggest that private banking clients, institutional investors, and listed company management teams all indicate a more positive investment sentiment towards China compared to last year. DeepSeek and the broader AI theme have helped re-rate China's internet/tech sector (which accounts for approximately 40% of MSCI China), narrowing the valuation gap with U.S. tech companies. We believe we are past the bottom in China's earnings downgrades, but the recovery path is still bumpy, especially with regard to consumption. Hence, we remain selective in the consumer space, especially “New Consumption” stocks, which have become excessively crowded.

Listed companies are cautious in their capital expenditure plans due to macro and tariff uncertainties, but they are increasing capex in high-growth areas like AI and overseas expansion. The competitive landscape in China remains intense, squeezing out smaller players but fostering a globally competitive cost structure. Chinese companies have remained calm in the face of U.S. tariff uncertainties, with detailed strategic plans to sell and/or produce overseas. Overall, we believe near-term visibility remains low due to tariff negotiations and lukewarm consumption. The recent rally (MSCI China +16%) has brought stock prices back to pre-“Liberation Day” levels and close to the high-end of our mid-2026 outlook range of 68-74. Although China remains underweighted by global funds, this gap has significantly narrowed over the past few months. A stronger macro and earnings recovery and a favorable U.S.-China tariff resolution could further boost EPS growth and multiples, potentially reaching our bull case of 82-87. For now, we prefer to trim excess positions and re-enter on a 10-15% market pullback or with structured strategies.

Chinese yuan

The Chinese currency has remained a laggard in Asia FX, strengthening 2% against the USD since April. The PBOC continues to uphold its FX stabilization policy, retracting measures that defend the yuan from depreciation while concurrently only allowing the onshore fixing rate to gradually decline, so as to mitigate yuan appreciation pressures against the USD. Without a breakdown in trade negotiations, FX stability around current levels can be sustained, while further escalation (as seen during the 2018-20 trade war) could lead to additional weakening pressure on the yuan. In a weak USD environment, USDCNH is expected to largely trade within a range of 7.1 to 7.3, while CNH could weaken against a basket of currencies. Year-to-date, the CFETS RMB index has fallen by ~6%, suggesting that CNH has significantly underperformed other major currencies. We expect this trend to continue—the PBOC may not welcome a significant decline in USDCNH, and it could instead pursue exchange rate stability against the USD while allowing CNH to weaken against other major trading partners to ensure stable support for exports. For investors seeking USD diversification, RMB assets may not be the most effective. 

Japan – Can domestic reflation overcome global risks?

External and internal macro

Heading into this year, we saw external headwinds bringing greater uncertainty in Japan, but domestic demand could stay resilient. This push-and-pull dynamic will likely continue to be in play in the second half of the year. The external sector is already bracing for challenges posed by sectoral tariffs on exports to the U.S. and reciprocal tariffs, which are still being negotiated. The uncertainty is likely to linger, meaning we are unlikely to have a comprehensive assessment of the economic impact for some time. Anecdotal evidence suggests export-oriented businesses are turning more cautious on their capex and labor demand outlook. The trade-related drag means growth may be slow to recover from the Q1 slump. This means the BoJ will likely slow down the pace of rate normalization—and we continue to think the chance for another hike this year is not high. Over the medium term, we think domestic demand may stay resilient, partly as the positive wage and inflation cycle is still intact. The spring wage negotiation has set the tone for another year of strong wage growth (>5%), partly due to the need to compensate for higher inflation, and partly in response to the shrinking labor force. Japan also still has a vital role to play in the global race for the AI buildout through its companies’ positions in global and regional supply chains. We still think there is a virtuous reflation cycle at play.

Inflation and bond yields

Japan’s inflation and bond yield dynamics have caught global attention this year. There are many factors at play, some short-term and others years in the making. But to put our conclusion upfront, we think higher yields are an inevitable part of the interest rate normalization process. Even now, the 30-year Japan government bond (JGB) yield is ‘only’ 3%—barely in line with inflation. Structural changes in bond demand and supply mean there are more upward pressures on the longer part of the yield curve as the market is trying to find the “clearing” price. But Japan is a net creditor to the rest of the world, meaning that there is a high chance buyers could return to the JGB market at a better price. Importantly, from a structural perspective, reflation is positive for Japan’s long-term fiscal trajectory. However, the move up in rates will likely be a bumpy process, as Japanese rates and FX are key parts of global markets, so the structural shift to a higher rate environment will likely put some upward pressures on global bond yields over the medium term, inviting more sources of market volatility.

Japan equities

We remain constructive towards Japanese equities over the medium term due to:

• There is a pickup in corporate reform efforts by management teams to raise ROEs (return on equity) and hence valuations. Over the past year, share buybacks have increased by 85%, and 2Q25 repurchase announcements are already tracking above the entire 2Q24.
• Foreign equity participation remains very low, with significant scope for higher allocations, especially if U.S. dollar currency diversification gains greater significance. It is worth noting that one-year total equity returns in USD are now higher for the TOPIX versus S&P 500 and could increasingly gain global investor attention.

• There could be a structural regime change as the economy sustainably reflates, driving higher nominal growth, greater investment, increased wages, and increased labor market mobility. 

Japanese management teams are displaying a sense of cautious optimism, and we acknowledge that TOPIX valuations have fully recovered back to historical averages at ~14.5x price/earnings. Upside to the high-end of our June 2026 base case TOPIX outlook of 2,750-2,950 is less compelling at current levels, and we would prefer to engage on ~5% pullbacks or utilize structures with downside hedging.

Japanese yen

With the currency being a key element of investing into Japan, the broad direction of the yen is key to investment returns. We have a structurally bullish outlook on the currency, expecting repatriation flows by Japanese investors and converging interest rate differentials to further support USDJPY downside. The yen is expected to be a primary beneficiary of USD diversification moves globally. Long-end JGB yields have risen significantly over recent months, making Japanese fixed income increasingly attractive compared with global bonds on an FX-hedged basis for domestic investors. While fiscal sustainability remains a concern, improvements in real wages and consumer spending provide a solid macro backdrop for a steeper yield curve. Interest rate differentials have historically been the dominant driver of USDJPY movements, and a convergence in rates with gradual Fed rate cuts and steady BOJ policy normalization could further support the yen over the next 12 months and beyond.

Semiconductors – Does DeepSeek change the outlook for chip demand?

The launch of DeepSeek in January 2025 significantly challenged the bullish AI narrative that dominated equity markets in the past two years. Investors are concerned that the drastically reduced AI computing costs might lead to diminished AI demand and reduced investments in the sector, potentially affecting profitability and growth prospects. This apprehension has led to a notable valuation de-rating of Asian semiconductor stocks, along with their global counterparts. The forward consensus price-to-earnings (P/E) ratio of the MSCI All-Country Asia Semiconductors and Semiconductor Equipment Index has de-rated by 20% (and down by as much as 30% at one point) since DeepSeek's introduction. This universe is now trading at a P/E of 13.6x, 21% lower than its five-year average.

Despite these concerns, data continues to indicate that AI demand remains strong, with hyperscalers accelerating their AI spending. The aggregate capital expenditure outlook for the next 12 months from the top four hyperscalers—Amazon, Alphabet, Meta, and Microsoft—has been revised upwards to over $320 billion, compared to approximately $250 billion at the start of the year. This represents an over 50% year-over-year increase, highlighting their commitment to expanding AI capabilities, which is crucial for sustaining industry growth. Industry checks suggest that AI demand remains robust and significantly exceeds supply, reinforcing our positive outlook on select Asian semiconductor companies, especially those with technological leadership that are well-positioned to benefit from the secular growth driven by AI accelerators and edge AI. Meanwhile, the non-AI semiconductor cycle appears more mixed with modest end-demand, and our views on memory pricing remain conservative. Although there are concerns about U.S. restrictions on AI accelerators, such as Nvidia’s H20, being shipped to China, we anticipate the announcement of further lower-specification products in the coming months as alternative solutions. The impact on the supply chain may be limited, as strong demand outside of China continues to persist.

India – Can growth momentum continue amid global headwinds?

One of our main investment theses for India was that it was relatively insulated from global trade turbulence and driven by structural tailwinds such as infrastructure investments and domestic consumption. However, some lingering inflation pressures led to overly tight monetary policy and a weaker-than-expected demand outlook last year, which dragged on private investment activity and also the equity markets. We see signs that these challenges are fading and for growth momentum to resume on the back of more supportive policy. The potential for India to benefit from elevated global trade tensions also remains. Inflation has been well-behaved, and the Reserve Bank of India (RBI) has recently maintained its forecast for CPI to stay below their 4% target in 2025. Furthermore, the RBI surprised the market with a larger-than-expected 50bps interest rate cut to 5.5% in early June, in addition to a 100bps reduction in the regulatory cash reserve ratios for banks, which could release additional liquidity and help boost lending to the economy. While the bar for further easing is high as the central bank’s policy stance has shifted to “neutral” vs “accommodative” before, the proactive monetary easing is a tailwind for domestic growth. On fiscal policy, income tax cuts for the middle class could also start to support urban consumption in mid-2025.

For the external economy, exports only represent 1.1% of India’s GDP, so U.S.-India trade tensions may not have a sizeable impact on growth. Furthermore, a potential bilateral trade agreement could create preferential trade access to the U.S. market, resulting in opportunities to benefit from trade diversion (particularly relative to some Southeast Asian economies). From a capital flows perspective, a pickup in global trade uncertainties could cause investors to gravitate towards more insular and domestic-driven markets and economies with a favorable structural growth outlook such as India.

India equities

Earnings estimates for Indian equities seem to have bottomed. Having declined for eight months, earnings estimates now look beatable—highlighted by the March quarter where the earnings beat rate was the highest in sixteen quarters. While valuations are slightly above five-year averages, we don’t view this as problematic as earnings growth is expected to re-accelerate as we head into 2H25. Our June 2026 MSCI India outlook is 3,130-3,225, offering 7-10% price return expectations over the next 12 months, driven by low-mid teens EPS growth starting from mid-2025. Small dips present (potential) buying opportunities.

Has Vietnam emerged as an investment opportunity?

Vietnam became a popular destination for manufacturers seeking a low-cost, potentially less politically risky base outside China during the first U.S.-China trade war. It became the poster child of the “China +1” strategy, seen as one of the few winners of supply chain realignments. This time around, the outcome is less clear-cut as emerging markets as a whole get caught up in a volatile tariff environment.

Since the first trade war, the Southeast Asian economy has seen a record influx of foreign investments, particularly in electronics manufacturing. Northern regions in Vietnam have become major production hubs, with global firms such as Samsung, Intel, and Apple suppliers establishing large-scale operations.

In 2024, Vietnam recorded the fourth-largest trade surplus with the U.S., following China, the EU, and Mexico. Nearly one-third of its exports went to U.S. consumers, making it the third most U.S.-dependent exporter after Mexico and Canada. That level of exposure now puts it directly in the trade war crossfire.

Facing potential tariffs of up to ~46%, Vietnam could be among the most vulnerable and least prepared to respond. For years, it benefited from assembling goods made with Chinese components and re-exporting them to Western markets, a workaround once tacitly accepted by previous U.S. administrations. But that same strategy has now drawn criticism from President Trump and his advisors.

While the U.S. may appear to hold greater negotiating power, both sides face constraints. Trump can pressure Vietnam to lower its tariff rates, agree to fairer trade terms, and perhaps increase energy and industrial imports from the U.S. However, from a cost perspective, manufacturing goods in the U.S. remains unviable—Vietnam’s production costs are nearly 47% lower.

Vietnam also has little to offer that aligns with Trump’s broader goals of reshoring high-value manufacturing and job creation. Unlike Korea, Japan, Taiwan, or even China, Vietnam’s exports are heavily concentrated in low-value, labor-intensive sectors—garments, footwear, agricultural goods—which do not create high-paying jobs nor contribute meaningfully to U.S. national security or strategic interests.

Companies like Samsung, which depend heavily on large assembly-line workforces, are unlikely to shift operations due to tariffs alone, as Vietnam’s low labor costs remain a key advantage for labor-intensive manufacturing. However, the country’s aspirations to move up the value chain and attract higher-tech, more automated production could be challenged if multinational firms choose to reshore or relocate to markets with greater political certainty or technological infrastructure.

Of particular concern is Trump’s recent threat to impose a 25% tariff on Apple products unless production is repatriated to the U.S., with similar pressure directed at Samsung. For Apple, relocating production back to the U.S. would be economically unfeasible—labor costs alone could raise production expenses by up to 13 times. Such rhetoric may present downside risks to Vietnam’s FDI outlook, given its central role in global tech supply chains. Vietnam currently accounts for ~25% of global production of iPads and Apple Watches, while Samsung contributes nearly ~20% of Vietnam’s total exports.

Although many investors recognize this as part of Trump’s negotiation strategy, it could keep capital on the sidelines and delay a return to a risk-on stance on Vietnamese markets, despite increasingly attractive valuations in emerging and frontier markets like Vietnam, as slowing investments and a murky global outlook could weigh on broader economic activity.