Investment Navigator Asia March 2025
This edition of the Investment Navigator for March 2025 focuses on two topics. The first one is on China and we try to answer the question whether there is still room for further rally in Chinese equities. The second one is on our high conviction on the US and EU financial sector.
Can the Chinese Rally continue?
China
China has set an ambitious growth target of around 5% for 2025, despite challenges like deflationary pressures, weak domestic demand, and a property slump. The government plans to issue substantial treasury bonds and local government special-purpose bonds to boost spending and support AI models and venture capital investment.
US & EU Earnings Season: Financials Shine
United States
In the US, companies have reported impressive earnings growth, with large banks performing exceptionally well and investment banking showing signs of recovery.
Europe
European banks and financials in general also demonstrate strong earnings growth and cash returns, with valuations remaining historically cheap.
Can the Chinese Rally Continue?
As US President Trump pursues protectionism, China vows to spend more and open to the world.
At the latest annual meeting of the National People's Congress (NPC), China set a bullish economic growth target of around 5% for 2025, despite a recent escalation in its trade war with the US. Chinese Premier Li Qiang pledged more aggressive spending to drive growth after acknowledging domestic challenges (deflationary pressures, weak domestic demand and a lingering property slump). To shore up growth, the deficit-to-GDP ratio for 2025 has been set at around 4%, an increase of 1% over last year.
Additionally, China will issue 1.3 trillion yuan in ultra-long special treasury bonds, and 4.4 trillion yuan in local government special-purpose bonds (up 300 billion yuan and 500 billion yuan respectively from 2024) to enable more spending.
At the annual meeting of the NPC, China also said that it would boost support for the application of artificial intelligence (AI) models and the development of venture capital investment, in a bid to foster more technology breakthroughs and become more self-reliant. It was the first time AI models were mentioned in the work report and comes after the recent global fanfare over Chinese AI startup DeepSeek. This reinforces our view that Chinese Tech companies offer great value.
Another key point to note is that China has the largest share of all Gen-AI related patents published globally and is still growing at the rate of 50% per year (see Figure 1). This clearly shows their ambition in leap-frogging the nation to the forefront of the AI race.
We expect the market to increasingly focus on AI-enabled revenues. Therefore, we may continue to see rotation out of Magnificent 7 as investors question the return on investment (ROI) amid their massive AI capex. Valuation wise, China Tech still offers a significant discount to the US despite an outperformance of EPS growth (see Figure 2). Near term, the HSTech is tactically overbought, and any weakness represents opportunity for entry.
US & EU Earnings Season: Financials Shine
US companies have announced an average earnings growth of +14.2% so far, quite better than the +8% that most were expecting in early January. +12% is expected for the full year 2025.
Results from US large banks were excellent. Most were generally way above expectations, which was also evident from their key businesses. Importantly, investment banking business was somewhat sluggish until recently, where a recovery is now confirmed and probably yet to be fully priced in. In fact, this kick started the broadening of the US market, with the financial sector outperforming the Magnificent 7 stocks (see Figure 3).
Accordingly, US banks are not that cheap, but a sound growth is expected in 2025 especially with Trump’s potential deregulation policies. A solid economy should help keep defaults in check, while the bi-product of higher rates for longer could provide additional tailwinds. Therefore, we estimate there is still potential at the US main banks.
Other financials are also in good shape. There are some concerns over insurers due to the fires in California, but related claims seem manageable. US private insurers’’ exposure to California had significantly decreased, and they are often reinsured for this type of cataclysm.
Germany proposed an unprecedented loosening of its “debt brake” rule to boost defense and infrastructure spending could be a “game-changer” for the sluggish economy. 4Q 2024 earnings results are modest. Nonetheless, they were still encouraging, with the highest contribution to earnings coming from one of our favourite sectors, financials (see Figure 4).
We continue to like European Banks and Financials in general. Earnings growth and cash returns have been sizeable and should likely continue in 2025 with many guidance upgrades. Additionally, valuations remain extremely cheap on a historic basis and relative to the rest of the market. The environment is still favourable for European Financials although they are facing more and more competition from their US counterparts. Some M&As and restructuring could also bring further support.
Overview of our CIO Asset Allocation for March 2025
