Investment Insights

This month we evaluate factors expected to attract attention in 2025 from a Japanese economy and equity market perspective. And as the government compiles another stimulus package, we discuss how Japan could be about to test the Laffer curve theory, which argues that tax cuts can actually increase overall tax revenue.

Asian local government bonds are positioned to perform well in 2025, supported by accommodative central banks amid an environment of benign inflation and moderating growth. We expect Asian corporate and bank credit fundamentals to stay resilient, aside from a few sectors and specific credits which may be impacted by tariff threats or US policy changes.

In 2025, US economic growth is expected to continue due to fiscal stimulus, despite above-target inflation. Meanwhile, the strong dollar could face disruptions, the Bank of Japan may keep raising interest rates and China is seen balancing domestic stimulus with potential US tariffs. European growth may recover slowly due to US tariff risks, and global central banks' policies will likely diverge to manage these challenges.

Our outlook for 2025 is relatively positive. We expect the business-friendly stance of the Republican Party, coupled with easier monetary policy, will be supportive for risk assets, particularly in the US market. While we hold various views, we rely on our strategic asset allocation to guide our long-term outlook—with healthy equities, short-dated credit, the US dollar and gold forming our backbone for the medium term.

With Japan overcoming deflation and ushering in a period of progress and consolidation despite market volatility and political upheaval, we expect Japanese companies to make strategic decisions in 2025 that attract global investors in larger numbers.

Asian local government bonds are poised to perform well in 2025 thanks to accommodative policies by central banks amid benign inflation and moderating growth. The global easing cycle is expected to lower global yields, thereby providing additional support to Asian bond markets.

Throughout history, equity investors have benefitted from maintaining a long-term view and an optimistic outlook on humanity's ability to prevail in the face of adversity. This might once again be the case, meaning that the biggest risk might be not having exposure to the highest quality earnings streams through a diversified portfolio of global equities.

We believe that a changing political environment could present opportunities across asset classes in 2025, with fixed income in particular poised to benefit as markets adjust to more realistic inflation expectations.

New Zealand's economy is faced with challenges including a weak currency, low productivity growth and slowed immigration. However, there are potential posi'tives, such as declining interest rates and possible gains in longer maturity bonds. Ultimately, recovery will require time and effort, with the central bank playing a crucial role.

As we head into 2025, we have picked three key elements that we believe will have the greatest influence over market behaviour and performance: interest rates, the strength of the New Zealand dollar and geopolitical uncertainty.

While 2024 was characterised by broad market gains (or “beta” returns) in Singapore, we expect 2025 to be more centred on generating excess returns (or “alpha”). We believe the service economy, represented by financial services and transportation, will continue to contain key sectors which offer high sustainable returns, positive fundamental change and growth.

Many may expect the incoming Trump administration's transactional approach to be detrimental to the geopolitical and macroeconomic landscapes. However, we believe that Washington's mercantilist stance should not prevent Asian markets from offering attractive absolute returns, as was the case during the 2017-2021 period under Trump's first term.

We believe that investors should strive for a diversified global portfolio of quality companies that can thrive in an environment where the cost of capital may be higher than previously expected. Our collective experience of the pandemic reminds us that such an approach is a good idea.

We increased the overweight to growth assets given that economic data remains resilient against falling inflation and as global central banks lower interest rates. Regarding defensive assets, we have been relatively negative on sovereign bonds, and despite the rate-cutting cycle underway, we maintain this view.

During the first Trump presidency, China outperformed the S&P 500 and all the perceived beneficiaries of "China Plus One". While history may not be repeated, it is clear that China's domestic policy and market environment will become significant factors during Trump's second presidency.

We have adopted a more cautious stance on Thai bonds with the Bank of Thailand not expected to ease policy further following its interest rate cut in October. Elsewhere in the region, the reappointment of Sri Mulyani Indrawati as Indonesia's finance minister provides a positive medium-term outlook for Indonesian government bonds

The highly anticipated Global Plastics Treaty carries high hopes as it will be the first attempt at forming a global legally binding instrument to address plastic pollution across its entire lifecycle. Tackling plastic pollution will be a long, bumpy road requiring international cooperation, stringent policies and significant financial investment to drive effective solutions.

The bond market has turned its attention to the likely size of further interest rate reductions now that the RBNZ has made two cuts to the Official Cash Rate in quick succession. Our view is that New Zealand's monetary policy is on track to revive the economy, although the recovery will take some time.

The RBNZ's recent shift to a more dovish stance already appears to have buoyed New Zealand's equities at this early stage of the cycle, with examples including signs of strength in the retirement village and rental sectors, and the market has been delivering strong returns.

The Federal Reserve's interest rate cut in November was largely expected. However, Fed Chair Powell's comments pointed to changes in language, suggesting a shift towards a more uncertain policy, with inflation and employment trends influencing future rate adjustments.