Despite ongoing market volatility, opportunities remain across asset classes. In China, the AI revolution, led by DeepSeek’s R1 launch, is driving renewed investor confidence in tech and internet stocks. While broader markets await earnings-driven catalysts, the stable RMB provides a supportive backdrop. Across Asia, structural trends in AI and automation continue to present long-term growth potential, despite short-term headwinds from tariffs and a strong USD.

Emerging markets navigate geopolitical uncertainties, yet select opportunities arise in resilient economies. Japan maintains strong corporate fundamentals, with policy stance adjustments creating potential opportunities. Fixed income markets benefit from robust demand, particularly in investment-grade bonds, though high-yield investors must be selective. Meanwhile, gold continues to shine as a hedge against policy uncertainties and geopolitical risks.

In this environment, multi-asset strategies provide stability and diversification, with income generation playing an increasingly vital role in optimizing returns.

Source: J.P. Morgan, MSCI, Morningstar, Data as of 31 January 2025.

China / Hong Kong equities

• Global markets have been very volatile given the uncertainties of tariff policies from Trump and the lack of visibility of the outlook of inflation and economic growth as a result.
• With the launch of the R1 model from DeepSeek which impressed the market globally at the end of January, global investors are re-evaluating the development of AI in China.  Tech and internet sectors as a result have been re-rated.
• However, other sectors didn’t move much given the unexciting consumption spending during lunar new year and the continued muted inflation.  Further rally of the market requires upward earnings revision of the companies in addition to re-rating.
• The direction of the US yields will depend more on the cost cutting by DOGE and the amount of Treasury issuance rather than rate cut by the Fed.  This will continue to put pressure on Hong Kong stocks which are more interest rate sensitive.

China A-shares

• The tech sector has been lifted by the excitement of DeepSeek, faster AI adoption, robotics, and auto pilots.  The RMB has been largely stable as China doesn’t want to appear too harsh to battle against Trump’s tariff polices.
• Uncertainties will persist.  There will be continuous sector rotation but not a general market rally until there is some policy breakthrough or clear improvement in macroeconomics.

Asia ex-Japan equities

• Sentiment towards the whole Asia remains subdue as the uncertainties on Trump’s tariff policies remain very high.  The strong USD started to put pressure on the Southeast Asia countries as funding cost is getting high. To battle with their slowing economies, some of the countries have cut interest rates and their currencies depreciated further as a result.
• The political risk in Korea remains but the impact to the market starts fading.  Taiwan tech rallied with good January revenue from strong AI demand, but the tariff concern will still hinder sentiment while valuation is getting demanding.

Emerging market ex-Asia equities

• Geopolitical risks remain highly uncertain although there is some de-escalation in the Middle East and Russia and Ukraine.  The 25% tariff on steel and aluminum from the US will impact Mexico and Brazil the most.
• The strong USD and high Treasury yields, however, are the biggest problems for the region.

Japanese Equities

• BOJ hiked in January given the high wage growth.  The JPY strengthened as a result.  However, as most of the wage growth came from discretionary bonus, BOJ may stay cautious on the next rate hike.
• Q3 earnings in general remain solid, however, with the uncertainties of Trump’s tariff policies, the market will remain range-bounded.

Asia investment grade bonds

• US long-yields came down slightly as the new Treasurer Bessent emphasized the need to lower the long-end yields.  Market is watching the conflicting actions between tariff and cost cutting by DOGE to inflation and yields.
• Spreads of Asia investment grade bonds remain tight.  On the other hand, demand remains strong with active new issuance after the new year.

Asia high yield bonds

• The strong USD may start to cause some funding pressure to some Southeast Asian countries which requires close monitoring.  Spreads remain tight in Asian high yield bonds as new issuance remains almost absent.
• After the rally in 2024, this year Asian high yield will need to be very name specific as global macro environment becomes more uncertain.

Emerging market debt

• Spreads have been at tight levels below historical averages. With increasing uncertainties in the market, the outlook for emerging market bonds remains volatile.
• The tariff impact to Mexico and Brazil will also add to further volatility in the market.

Gold

• Gold prices continue to break historical high despite the strong USD backdrop.  Investors have been buying gold as a hedge against the uncertainties on Trump’s policies.
• Moreover, central banks are still buying gold in their reserves to lower their dependence on USD. However, with more than 10% rally YTD and approaching the psychological level of 3000, some profit taking may occur in the near term.
• In the longer term, heightened geopolitical risks will continue to support the outlook of gold.  In addition to geopolitical worries, investors are concerned about the de-dollarization trend as USD may gradually be reducing its role as global trade currency.

Multi asset

• A multi-asset strategy offers lower volatility compared to traditional single-asset or balanced portfolios. However, the correlation between risk assets, such as equities, credits, and commodities, has recently increased dramatically.
• In an uncertain environment, income becomes an essential source of return for investors.

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^{The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable as of the date of presentation, but their accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.}

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