Resilient growth buoys Asia

ASIA’S investment outlook presents a compelling yet intricate narrative as global economic uncertainties persist. Despite ongoing geopolitical tensions and evolving trade policies, the region’s resilience and strategic economic positioning are expected to sustain its growth trajectory.

The year started with positive momentum as China’s economic stimulus measures began to show signs of success.

Shortly after, an unexpected tech breakthrough emerged from DeepSeek, a relatively unknown startup, which revitalised optimism regarding China’s ability to navigate US trade restrictions and remain competitive in global technology markets.

This development not only brightened China’s economic outlook, but also underscored Asia’s advancing leadership in artificial intelligence (AI) innovation.

However, this optimism was tempered by the imposition of additional tariffs and mounting uncertainty surrounding global trade policies. Notably, since the beginning of Donald Trump’s presidency, the United States has imposed an additional 20% tariff on Chinese imports.

Fidelity observes that while much of Asia has been spared from these levies, the threat of widening trade tensions continues to loom large for economies across the region.

Essentially, eight out of the 15 economies with the largest trade surpluses with the United States are in Asia, illustrating the region’s vulnerability to American protectionist measures.

Given Asia’s export-driven economic model, further tariffs could strain profit margins for exporters who are already grappling with the fallout from China’s recent economic challenges. However, bilateral negotiations could potentially defuse some of these trade tensions.

More importantly, Asian nations have policy mechanisms at their disposal to mitigate the impact of tariffs when necessary.

Paradoxically, heightened trade pressures could inadvertently stimulate growth in the region.

Fiona Shou, a China-based real estate equity analyst at Fidelity, notes that an increasingly challenging external environment may prompt policymakers to introduce additional support for the domestic property sector, which could offer companies some relief. However, she warns that if broader economic conditions deteriorate sharply, declining income expectations could weaken consumer demand.

Interest rate changes

Meanwhile, inflation has remained relatively subdued across most Asian economies, providing central banks with the flexibility to ease monetary policies and stimulate growth, Fidelity notes.

“A gradual reduction in interest rates could lead to mild currency weakness but should also give exports a more competitive advantage in international markets,” it points out.

“That said, Asian central banks will be careful about the timing, keeping a close eye on the Federal Reserve policy decisions to maintain stability in cross-border capital flows,” it adds.

Japan’s economic landscape presents a unique scenario, with negative real yields posing a challenge for policymakers.

Fidelity notes that although the Bank of Japan (BoJ) chose to hold rates steady in March, potential interest rate hikes remain a possibility if inflation gains momentum. It forecasts a continued moderate recovery in Japan’s economy, supported by steady consumer demand and solid corporate investment.

In addition to monetary policies, Asian governments retain ample fiscal headroom to introduce economic support if conditions deteriorate, Fidelity says.

At China’s annual legislative meeting last month, policymakers raised the nation’s official deficit target to 4% of gross domestic product (GDP), the highest in over 30 years and up from 3% of GDP the previous year.

This reflects a clear intent to maintain growth momentum, leaving room for further stimulus measures should economic pressures escalate, Fidelity says.

Geopolitical tensions

Geopolitical risks remain an ongoing concern, yet Asia’s economic resilience continues to provide a buffer against most tariff-related shocks.

South-East Asia, in particular, is poised to benefit from supply chain diversification away from China, which is expected to attract greater investment inflows and contribute to regional growth, Fidelity highlights.

The outlook for other Asian countries is also quite positive.

For instance, India’s economy is set to expand further, buoyed by strong domestic consumption and government infrastructure investments, Fidelity states.

The trajectory of China’s recovery is pivotal for the broader Asian economy due to the nation’s deep integration in regional and global supply chains. Encouragingly, Beijing’s recent stimulus initiatives have spurred a modest recovery, most notably within the property sector.

Rising inflows

Beyond macroeconomic factors, Asia’s growing dominance in AI innovation is expected to further reinforce the region’s growth outlook. Capital is already flowing into North Asian equities as well as Asia’s high-yield and investment-grade bonds.

Fidelity anticipates these inflows to accelerate in the second quarter of the year, driven by attractive valuations and relatively stable policy environments across key markets.

In the broader context, Fidelity’s recent analyst survey highlights varying degrees of concern regarding tariff impacts.

While analysts covering North America, Latin America and Europe expect tariffs to pressure corporate profitability significantly, their Asian counterparts foresee relatively milder effects.

According to Fidelity, while China faces significant uncertainty over the future direction of US trade policies, the burden of tariffs could be relatively muted.

The situation is less positive for Fidelity’s North America-focused analysts.

The group’s fixed-income analyst Robert Glatt, who covers retail and leisure companies, says tariffs are driving cost inflation, which is creating concerns that there will be a pullback in consumer spending.

Sharing the sentiment is Fidelity’s analyst Chase Bethel, who covers consumer staples.

“Tariff negotiations are creating uncertainty. This could cause consumers to be more apprehensive about spending and companies to be more apprehensive about making certain investments,” he says.

Fidelity notes that its analysts outside North America also express concern about the second-order effects tariffs could have on the economic environment.

Oliver Trimingham, who covers European capital goods makers, says that the direct impact of tariffs is largely manageable due to the pricing power of these companies.

“However, knock-on effects to economic confidence and customer capital expenditure are more concerning,” he adds.

Asia Pacific-focused equity analyst who covers the textile, apparel and jewellery industries, Priyadarshee Dasmohapatra, concurs, saying US recession, irrespective of what causes it, would be a risk to exporters.

Sector-wise, Fidelity analysts reckon energy could be hit hardest by tariffs.

European energy analyst James Trafford argues that a trade war is likely to hurt oil demand, adding that this effect could be amplified by other geopolitical developments.

While lower oil and gas prices pose a challenge for energy producers, they could simultaneously offer relief to other sectors. As Alexander Laing, a European utilities analyst, explains: “Downward pressure on gas prices feeds directly into power prices,” potentially easing cost burdens for businesses and consumers alike.