Outlook for Asian Stock Markets in 2025

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The performance of Asian stock markets has been quite impressive throughout this year, showcasing resilience amidst global uncertaintiesAs of December 26, 2024, major indices recorded significant gains with Japan’s Nikkei 225 climbing by 18.24%, India’s Sensex rising 8.63%, Shanghai Composite Index appreciating by 14.22%, and Hong Kong's Hang Seng Index increasing by 17.9%. With potential tariff risks looming and challenges posed by the Federal Reserve's interest rate policies, what lies ahead for Asia’s markets in the upcoming year remains a compelling subject of interest.

Looking forward to 2025, Asia is expected to remain one of the most attractive markets for global long-term investors, with regions such as Japan, India, and Indonesia drawing significant attention

In a recent interview, Fannie Wurtz, head of distribution and wealth for Amundi Asset Management, highlighted Japan as the most favored market in Asia for 2025, despite facing a high valuation and macroeconomic headwinds, India's long-term bullish sentiment remains intactThe sentiment among global investors regarding China's stock market is also on the rise, particularly if stimulative measures can revive consumer spending, which is anticipated to outperform external demand sectors.

Japan Stock Market Highly Favorable

Japan’s stock market continues to be the top choice for investment institutions looking towards 2025. Factors such as rising wages, ongoing governance reforms, a persistently weak yen, and a gradual increase in interest rates are all contributing to this positive outlook

Additionally, Japan appears to be less affected by overseas tariffs compared to other countries.

According to the Bank of America Merrill Lynch’s Asia Investor Survey conducted in December, Japan received a net bullish sentiment of 48%, the highest among Asian markets, thus showcasing the robust appetite investors have for its stocksIn contrast, Taiwan’s stock market, sitting in second place, only garnered a net bullish sentiment of a mere fractionThis evidences the overwhelming preference for Japanese stocks which are currently considered over-weighted.

Goldman Sachs has provided some intriguing insights regarding Japan's political landscape as similar to scenarios witnessed between 1996 and 2000, wherein the Liberal Democratic Party, despite not having a majority, effectively governed through coalition frameworks

The baseline forecast for 2025 anticipates an uninterrupted policy-making and implementation process.

The bullish sentiment towards Japan also stems from the ongoing governance reforms and the positive impact of rising inflation combined with an upward trend in wage levels, contributing to notable economic recovery, especially in the consumer segmentDespite a shift in valuations not being as appealing as last year (with an estimated valuation of 14x), overall prospects for earnings growth are still encouraging.

Exchange rates, notably, play a pivotal role in this landscape

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According to Goldman Sachs, despite profitability declines in the second quarter, these figures are expected to stabilizeThe firm's profit-revision index entered negative territory in October, primarily influenced by the significant Yen appreciation from July to SeptemberHowever, a rebound of the dollar against the Yen since late September helps mitigate concerns regarding negative impacts on corporate earnings due to a strong Yen.

Goldman Sachs' Forex strategists foresee the USD/JPY exchange rate predictions at 155 in three months, 157 in six months, and 159 in twelve months, indicating that the Yen is expected to weaken further over the next year.

It also aligns with expectations from analysts like Yao Yuan, who pointed out that there is an inverse relationship between the Yen's performance and the Japanese stock market

Should the Yen not appreciate drastically, mild upward adjustments would likely not threaten the momentum of the stock market.

The Bank of Japan’s monetary policy is also seen to be favorableWith expectations for at least two more rate hikes to combat rising inflation, the central bank is likely to maintain a balanced approach rather than pursue a radical stanceThis scenario positively bodes for Japan's stock market.

During the December interest rate meeting, the Bank of Japan decided to keep rates unchanged

The central bank Governor Ueda Kazuo explained that there was insufficient information regarding wage growth in the upcoming spring wage negotiations, as well as significant uncertainty surrounding the economic policies of the new U.Sgovernment, leading to the decision not to raise rates at this timeMuch anticipation surrounds whether a rate hike of 25 basis points could occur in January, but if wage growth fails to gather momentum or uncertainty persists, potential delays could push the hike back to March or April, which reduces pressures regarding Yen appreciation fears among investors.

Indian Market Facing Economic Headwinds and High Valuations

In recent years, India has emerged as a shining star of Asia's equity markets, drawing attention for its long-term economic growth potential, manufacturing upgrades, and rising foreign investments

However, in the third quarter of 2024, the Indian stock market started to experience outflows due to historically high valuations and unfavorable macroeconomic conditions.

The depreciation of Asian currencies has also added pressure on India, with the month of October witnessing a significant capital outflow exceeding $10 billion from overseas institutional investors—the largest single-month withdrawal recorded in history.

There are growing investor concerns regarding the slowdown in consumption

Although India's consumer market remains vast, the economy is currently experiencing a "K-shaped recovery" where the premium consumption, travel, and luxury segments are thriving, while daily consumer goods are hitting growth ceilings.

Moreover, India's credit growth has reached its lowest point in nearly three yearsThe slowdown in unsecured loan growth has introduced uncertainty into the financial sector, which in turn dampens investor confidence in Indian financial stocks.

Amidst this landscape, asset quality deterioration within India's financial system has garnered significant investor attention, potentially resulting in banks being reluctant to expand lending, adversely impacting the overall economy.

Despite various favorable reform policies introduced by the Indian government, the changing U.S

economic policies and shifts in global trade dynamics have posed significant pressures on the Indian economySome investors are concerned that valuations may not be sustainable, particularly with a backdrop of slowing global economic growth.

Nonetheless, Yuan remains optimistic regarding the mid-to-long term perspective that international funds hold towards IndiaAccording to him, India's urbanization and per capita GDP levels are comparable to China’s 20 years ago, with a total GDP about one-fifth of China's, presenting a vast potential for development

Numerous market-friendly reforms initiated by the Modi government are positvely influencing the overall economic outlook for India.

However, the current market valuations remain high, with the adjusted index's weighted P/E ratio exceeding 30x, indicating many favorable developments have already been priced inAdditionally, unlike China's reliance on external demand and manufacturing, India focuses on an internal demand-driven model, primarily leveraging the serviced sectors for growthThus, from an industry perspective, service-oriented and consumer-related sectors remain promising.

Focus on China's Stimulus Policies to Revitalize Consumption

Despite a rocky start to 2024, China's stock market has displayed noteworthy performance throughout the year, ranking in the top 37% of the past three decades

The MSCI China index's performance on overseas-listed companies was among the top 30% during the same timeframe.

From a global perspective, China's stock market has also performed robustly this yearOverseas-listed Chinese stocks ranked just after U.Stech stocks (such as those on the Nasdaq), while A-shares outperformed European and Japanese markets, along with several emerging markets, including India, South Korea, Saudi Arabia, Mexico, Indonesia, and Thailand, measured in USD.

Moving into 2025, despite uncertainties surrounding tariff policies, market expectations for China's stock market are notably improving

Huang Senwei, a senior market strategist at Invesco, mentioned that under the guidance of stimulus policies, the domestic economy is expected to emerge from its low point and gradually stabilize, which could revitalize corporate earningsCurrent market consensus predicts that earnings for A-share listed companies may grow by 13.6% in 2025, placing them second only to the U.Sin the major global market outlook.

Additionally, China has ample space for policy maneuveringFor instance, stimulating consumer spending holds significant potential as the consumer expenditure's share in GDP is lower than that of many developed and emerging markets

Continued policies aimed at boosting consumption could provide a solid foundation for economic growth, ultimately increasing stock market investment confidence.

Nonetheless, the real key hinges on the effectiveness of policies once they're rolled outYuan emphasized that foreign investors are keen on the specifics regarding stimulus allocations and the effectiveness of these measures for revitalizing consumptionForeign investors perceive stimulating consumption as more sustainable than infrastructure investments.

He noted that the “trade-in” policies initiated in Q3 have positively impacted consumer purchases for appliances and vehicles, sending strong signals of consumer demand beyond merely saving

More significantly, as external demand is expected to decline in 2025, domestic consumption must emerge as the core driver of economic growth.

In this context, the performance of consumer-related sectors tied to domestic demand continues to gain traction as intermediaries anticipate announcements of consumption-friendly policies ahead of the “Two Sessions” conferenceSeveral institutions indicated to reporters that if sufficient internal demand policies are delivered, they will likely invest further in domestic demand-related sectors

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