So far this year, Asian stocks have rallied 24% in USD terms, outperforming global equities by 6%. Despite this recent outperformance, the 10-year track record leaves much to be desired, with Asian stocks lagging their global counterparts by 5% a year. In our view, we believe 2025’s outperformance marks the beginning of a multi-year trend, rather than an anomaly that will revert to past patterns.
Below, we summarize a few catalysts that we believe will likely drive Asian equities to continued outperformance over the next 12-18 months:
Valuations have drifted significantly below global markets, with Asian stocks trading at 15 times forward earnings, compared to 20 times for developed markets and 23 times for the U.S. This represents one standard deviation below historical averages. Even a marginal shift back to the historical average of a 14% discount to global valuations (vs. 25% today) implies significant upside on a relative basis. The one exception is India, which continues to trade at a premium. Its recent correction from 2022 valuation highs has not yet run its course and thus we await cheaper entry points for an India overweight.
Tariff Uncertainty is largely behind us with the marginal change now fully priced by markets. The path going forward will now be driven by trade rerouting optimization, greater ex-U.S. trade growth and a focus on domestic markets. The year-on-year comparisons will fade and tariff headwinds will steadily be replaced by status quo, providing a potential tailwind to local markets. A post-tariff world will be less U.S. growth-driven, potentially providing diversification as the U.S. economy slows.
Currency dynamics favor Asia. The U.S. dollar remains overvalued on most major metrics, and U.S. capital inflows, fiscal and trade deficits point to further FX adjustment. So far this year, European currencies are up ~10% against the dollar, while Asia remains mispriced, particularly in areas where the U.S. trade deficit is most pronounced. As China grows more comfortable with a stronger yuan, there will be scope for the yen, Korean won, and Singapore dollar to strengthen as well. USD returns of their stock markets are likely to outperform U.S. stock market returns as a result.
Korea holds the crown for the region’s cheapest market. However, it is chipping away at the “Korea discount” by following in Japan’s footsteps and implementing governance reforms that encourage greater focus on shareholders and are starting to deliver greater buybacks, dividends, and tighter capital discipline. The potential for re-rating from domestic retail investors and international investors returning is high.
China is the second cheapest on a relative basis, but the bad news is largely behind us there, too. Property difficulties are known to all and have likely troughed. China continues to export overcapacity and deflation to the rest of the world, but this approach has a limited shelf life and will necessitate domestic change. The name of the game will be domestic consumption and initial signs in the form of tech sector outperformance, domestic champion investment after years of cost savings, and reawakened stock market animal spirits all point in the right direction.
Japan is the largest market and is also the main developed market one. The yen is one of the cheapest currencies in the world and the return of inflation plus continued shareholder-friendly policies are resulting in capital inflows that should support equity markets, particularly in USD terms, for some time.
While it is too early to call the latter half of the 2020s in favor of Asian markets, investors concerned about high U.S. valuations should look to diversify into North Asian markets like Japan, China and Korea. The combination of low stock and currency valuations, fading tariff headwinds and ongoing regulatory reform and domestic focus should drive continued outperformance over the medium-term.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at al times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.
