We continue to be constructive on China and Japan equities, notwithstanding lingering trade risks with the U.S. In fixed income corporates, we prefer higher-quality credits.
June 18, 2025
By Jasmine Duan, Nicholas Gwee, CFA and Shawn Sim
We expect Chinese equities to be largely range-bound in H2 2025 after a strong first-half performance. Two major performance drivers will likely be U.S.–China trade negotiations and corporate earnings.
The U.S.-China 90-day tariff truce will end on Aug. 10. While the worst-case scenario has been avoided, news on further trade negotiations would likely fuel market volatility.
Meanwhile, investors are monitoring signs of fundamental recovery. Chinese companies’ earnings-per-share (EPS) revision trends have been leading regional peers since the beginning of the year. First-quarter corporate earnings were generally upbeat, but mixed results from several large technology and consumer companies highlighted heightened industry competition, increased investment, and profit margin pressure. With tariff impacts starting to materialize, we think investors will pay attention to earnings resilience and whether EPS recovery can support further valuation expansion. Regardless, we anticipate additional government reforms, such as greater market access, industrial policy changes, and policy stimulus, could potentially provide upside surprises for the market.
For Japan equities, we think a Japan-U.S. trade deal is likely but may not occur until after July’s elections for the upper house of Japan’s legislature. Japan’s equity market has priced in tariff cuts, and price action related to this in the auto sector appears too optimistic, in our view.
Japan’s upper house election is to be held by July 22. Given the poor showing in the October 2024 snap election, which saw the incumbent Liberal Democratic Party (LDP) lose its majority for the first time since 2009, we think this election bears watching. We do not rule out a brief period of political instability if the LDP position is further weakened. Given most opposition parties have called for a lower consumption tax, the ruling party may need to make concessions on this front to shore up support.
Notwithstanding the political headwinds, we maintain our constructive view on the Japan equity market as a sustainable two percent inflation target seems in sight and other factors should be supportive such as the renewed investment from friend-shoring and on-shoring, improving return-on-equity and shareholder returns, resilient domestic demand supported by high savings and wage hikes, inbound tourism, and elevated domestic retail inflows under the revamped Nippon Individual Savings Account scheme.
Asia credit markets experienced notable volatility in Q2 2025, driven by U.S. President Trump’s “Liberation Day” tariff announcement on April 2. This triggered a sharp widening in credit spreads with Asia investment-grade (IG) widening by 51 basis points (bps) and Asia high-yield (HY) by 167 bps. However, spreads quickly retraced, and Asia HY greatly outperformed Asia IG on the subsequent compression rebound, tightening the HY-to-IG spread premium beyond pre-“Liberation Day” levels.
In China, we believe policy support and further stimulus will be required to stabilize credit conditions, especially in property-related and private sectors. The recent de-escalation in U.S.-China trade tensions, marked by significant tariff reductions, has helped ease immediate downside risks and supported a retracement in credit spreads. However, the U.S. effective tariff rate remains historically elevated, and China continues to face structural economic headwinds, particularly from its ongoing property-sector crisis. We see selective opportunities in China credit space, but credit differentiation is critical.
Japan government bond (JGB) yields have made among the highest year-to-date moves across Asia and developed global markets. This is due to several drivers including domestic policy shifts, fiscal challenges and global financial market trends. Domestic institutional investors, such as Japanese life insurers, are among the largest holders of these bonds. Despite these elevated yields, major Japanese life insurers are taking a cautious approach to the recent spike in JGB yields in April and May; instead, they are net selling JGBs. In our view, this is due to uncertainty over the Bank of Japan’s (BoJ) policy outlook, tariff impacts, and potential volatility in ultralong JGB yields. Additionally, major life insurers are also preparing for higher capital requirements to withstand a potential surge in surrender rates, thereby further reducing demand for long-end JGBs and contributing to yield volatility.
Looking to H2 2025, we expect Asia credit to remain a carry play where returns would be mainly driven by income, with a more defensive bias towards higher-quality credit. We maintain a preference for IG over HY credit, given that much of the “Liberation Day” spread widening has already retraced. This leaves limited room for further compression, particularly in HY. Nonetheless, we believe Asia IG continues to offer attractive all-in yields, currently sitting at the higher end of historical ranges. Much of Asia ex-Japan IG remains anchored by domestic demand, and market expectations of a negative bond supply this year should keep the space well supported. Given the backdrop of moderate economic growth and ongoing macro risks, we favour positioning in higher-quality Asia IG names.
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