2025 Q4 Market Outlook - Equities in Focus: Positioning for Growth as Rate Cuts Resume

Positive on equities as the Fed resumes its rate-cutting cycle
Favour U.S. equities for their economic resilience and sustained AI investment momentum, despite slowing growth
Cautious on Europe amid France’s political instability and rising debt; prefer Japanese equities on strong macro momentum
Asia supported by liquidity and currency strength; China/HK equities benefit from anti-involution policies, while South Korea gains from tax reform rollback

Rate cut to benefit risk assets; optimistic on US, Japan and Asian markets such as China

As expected, the Federal Reserve cut interest rates by 25 basis points in September, with Chair Powell framing the move as a “risk management” step. While inflation remains elevated, weakening job creation has introduced downside risks to the labor market, prompting a shift toward a more neutral policy stance. The latest dot plot suggests the potential for two additional rate cuts before year-end — a tailwind for risk assets.

Against this backdrop, the team maintains a constructive view on equities. U.S. equities remain favored due to the economy's underlying strength. In contrast, the team has turned more cautious on Europe, citing political instability in France. Japan continues to demonstrate solid economic momentum, and markets expect the new leadership to introduce proactive fiscal measures to curb inflation and strengthen U.S.-Japan ties. The team has also upgraded its view on broader Asian equities, favoring China/HK on ample liquidity and South Korea following the withdrawal of a proposed capital gains tax reform.

Source：federalreserve.gov, as at 19 Sep 2025

Positive on US, Japanese equities on sustained economic resilience; Turning cautious on Europe due to France's political instability

The Fed's dual mandate — supporting full employment and managing inflation — has come under pressure. In August, U.S. inflation rose 2.9% year-on-year, the highest since January. Although the Fed views this as transitory, the labor market is showing signs of strain. August non-farm payrolls increased by just 22,000, well below expectations, while the unemployment rate edged up to 4.3%.

Despite these headwinds, the U.S. economy remains on solid footing. The Fed raised its 2025 growth forecast from 1.4% to 1.6%, corporate earnings remain resilient, and AI-related investment continues to expand. However, uncertainties persist — notably, the U.S. Supreme Court is expected to rule on former President Trump tariff policies by year-end, which could influence market sentiment.

In Europe, political instability and widening deficits in France prompted Fitch Ratings to downgrade the country's sovereign credit rating, triggering bond market volatility. Eurozone growth remains sluggish, with Q2 GDP rising just 0.1%. However, Germany EUR 500 billion infrastructure fund and debt reform signal a proactive fiscal stance. While the short-term impact may be limited, the initiative could add 0.5–1% to eurozone GDP over the medium term. Given mixed data and external risks, the team maintains a neutral stance on European equities.

In Japan, the resignation of Prime Minister Shigeru Ishiba and the election of Sanae Takaichi as the new LDP leader have raised expectations for fiscal stimulus aimed at supporting households and curbing inflation. Japan economy remains robust: Q2 GDP grew at an annualized 2.2%, marking five consecutive quarters of expansion. Exports also improved, contracting just 0.1% year-on-year in August versus a 2.6% decline in July. Given this favorable macro backdrop, the team remains constructive on Japanese equities, while closely monitoring the new administration policy direction and monetary stance.

Favour Asian equities including China/HK, South Korea; China's price trend eyed

The team has upgraded its view on Asian equities, with a preference for China, South Korea, and select Taiwanese tech names. A strengthening renminbi and broad gains in Asian currencies are expected to attract global capital into emerging markets.

In mainland China, ample liquidity and increased margin financing have supported China/HK equities. The team favors the region on the back of anti-involution policies, accelerating tech localization, and easing U.S.-China trade tensions. However, economic activity and inflation remain subdued. August manufacturing PMI stayed in contraction at 49.4, while consumer prices fell 0.4% year-on-year — the second dip into deflation in three months. Factory prices are showing early signs of stabilization as authorities address overcapacity and excessive competition.

The outlook for Chinese equities will depend on the scale and timing of further policy support and the trajectory of deflationary pressures. Still, reasonable valuations and policy tailwinds support the team's view that China/HK equities offer compelling bottom-up stock-picking opportunities. As global interest rates peak, value-oriented Asian equities with stable dividends — particularly in China and Hong Kong — are likely to attract sustained global inflows. While overall consumption remains soft, signs of stabilization are emerging, with consumer discretionary and emerging consumption sectors showing resilience. Additional stimulus measures may further bolster domestic demand.

Source： https://www.stats.gov.cn/, as at 19 Sep 2025

Beyond China, South Korea is another favored market. Earlier concerns over President Lee Jae-myung's proposed capital gains tax threshold weighed on sentiment, but equities rebounded after the plan was scrapped. Q2 GDP rose 0.6% year-on-year, and the recent U.S. rate cut gives the Bank of Korea room to ease policy — a potential boost to liquidity. The team remains positive on South Korean equities, particularly in AI-related sectors, which are expected to benefit from expanding infrastructure and accelerating adoption.

Conclusion

With the Fed resuming its rate-cutting cycle, risk assets are poised to benefit. Our team maintain a preference for U.S. and Japanese equities, alongside select Asian markets including China and South Korea. In contrast, political instability in France warrants a more cautious stance on Europe. Given persistent global uncertainties, investors are advised to maintain diversified exposure across regions and sectors to manage risk effectively.