• While Asia's reliance on trade makes it highly vulnerable to tariff tensions, many of the region’s central banks have room to ease monetary policy, offering a buffer against their impact. 
• Investors are reallocating funds from traditional safe havens towards Asia, drawn by its potential for growth, currency appreciation, and evolving consumer markets. 
• Despite the near-term uncertainty caused by US tariffs, Asia's long-term growth prospects remain robust, supported by ongoing favourable structural shifts in China, Japan, and India, and strategic positions in the AI supply chain for countries like South Korea and Taiwan. 

Asian markets breathed a sigh of relief after the US and China reached a temporary agreement on tariffs in May. But after all the surprises, twists, and turns, to say a great deal of uncertainty remains is fast becoming the clichéd understatement of the year. 

One thing is for sure. We are in a new era of geoeconomic fragmentation. Neither the US nor China says it wants to fully decouple from the other, yet there is growing evidence of that happening in strategic areas. Asia’s reliance on trade as an engine for growth leaves it particularly exposed to those tensions. Meanwhile frequent shifts and reversals in trade policy make it doubly challenging for governments to deliver timely fiscal and monetary policy responses. 

However, compared with others, many Asian central banks have more monetary room to soften the impact of tariffs on their economies. While inflation remains sticky in the US, it is cooling in most of Asia, and a recent surge in the region’s currencies gives central banks more leeway. We expect to see more monetary easing through the second half of 2025.

Investors looking to diversify their portfolios through this new era will find much to like in Asia. Here are some of our top convictions for the months ahead:

1. Asia’s investment grade local currency government bonds: these are now an appealing diversification play, which will benefit from potential interest rate cuts. 

2. Currencies: remain historically cheap even after the recent rally. 

3. China technology stocks: China’s ongoing shift from the world’s factory to the world’s innovator will further unlock the growth potential of tech firms. 

Compelling grounds 

Uncertainty around US trade policy combined with its growing debt burden is pushing global investors to reallocate funds away from the traditional safe havens of the dollar and long-duration Treasuries. There are a number of areas where Asia is set to benefit from the shift.

We like Asia’s investment grade local currency government bonds. They exhibit low to moderate correlations with major global peers, which makes the asset class a good diversification tool. After years of development, the markets are far deeper than they once were, driven by growing economies and increasing support from regulators. More index providers have added the region’s local currency bonds to their global indices, enhancing the appeal of the asset class. Central bank rate cuts and the potential for currency appreciation should lead to a boost in demand for the asset class. 

Despite the recent rally, Asian currencies still look cheap relative to their historical long-term averages, as measured by the real effective exchange rate. Demand for the region’s currencies is likely to pick up further as investors seek dollar alternatives and position for ongoing tariff talks. 

Change is afoot

Structural shifts in Asia’s biggest economies are strengthening arguments for regional allocations too. Chinese policymakers have been focusing more on supporting domestic consumers as part of the country’s moves to achieve its target of around 5 per cent growth this year. In March 2025, the government expanded a state subsidy programme that provides discounts on purchases of new consumer goods. The targeted approach is starting to help: the six-month moving average for sales of home appliances jumped in April by the most on record. 

There is still some way to go, however, for the country to rebalance its economy toward consumption-led growth, including building out its threadbare social safety net and funnelling more resources from factories to households.

The stratospheric rise of AI start-up DeepSeek earlier this year took the world by storm, marking a turning point for how global investors perceive the Chinese tech sector. No longer just the world’s factory, it is now a worthy rival for the title of the world’s innovator. Despite US export controls, advancements are being made across sectors, as the country embraces many new technologies at a faster rate than anywhere else. We think this momentum has further to run, with more growth potential in tech stocks.  

Beyond China, Japan’s reflation story remains intact. After decades of stagnation, the ‘virtuous wage price cycle’ policymakers have been aiming for is well under way. Major Japanese companies have promised large pay increases for their workers this year. The wage growth is expected to translate into a recovery in consumption. While export-oriented sectors are reeling from US tariffs, domestically-focused companies, such as banks, should fare better. 

India, which has a large and young population and low dependence on exports, is well positioned to withstand uncertainties in a global trade slowdown. The policy backdrop, with monetary easing and fiscal consolidation, will help the economy pivot toward private sector-driven growth. Cuts to income tax will enhance the purchasing power of the country’s rising middle class, helping to offset the weakening outlook for global demand. 

Others stand to benefit from the developing AI story - for example, leading chip makers in South Korea and Taiwan, thanks to their strategic positions in the AI supply chain. Despite uncertainty surrounding potential tariffs, the robust AI demand will support their promising outlook. 

The long view

There’s no denying that the challenges posed by US trade policy for Asia more broadly are acute and could lead to a slowdown in export orders, while weighing on corporate confidence and delaying capex plans.

But while the region’s economic outlook may be challenged in the near term, the reshaping of the world order in manufacturing, trade, and technology means global investors can’t ignore Asia’s diversification benefits and long-term structural growth potential.