Global Equity Rotation: U.S. Outperformance and Asian Challenges in 2025

The global equity landscape in 2025 is being reshaped by stark macroeconomic divergences between the United States and key Asian markets. As the U.S. economy demonstrates resilience amid a high-rate environment, countries like China, India, and Japan grapple with deflationary pressures, currency volatility, and inflationary headwinds. These divergences are fueling a rotation in capital flows, with investors recalibrating portfolios to reflect shifting growth and risk profiles.

U.S. Resilience and Policy Flexibility

According to a report by Deloitte, U.S. real GDP growth is projected to reach 2.8% in 2024, outpacing most advanced economies despite elevated interest rates Global Economic Outlook, January 2025, Deloitte^[1]. This outperformance is underpinned by robust consumer spending, driven by a tight labor market, inflation-adjusted wage growth, and increased immigration. The Federal Reserve has responded to moderating inflation by cutting the federal funds rate by 100 basis points between September and December 2024. However, further rate cuts in 2025 are expected to proceed cautiously, as services inflation remains stubbornly high. The Fed's measured approach reflects concerns about economic uncertainty, particularly around President-elect Donald Trump's policy agenda, which has introduced volatility in financial markets Global Economic Outlook, January 2025, Deloitte^[1].

Asian Divergences: Growth, Deflation, and Currency Pressures

In contrast, Asian economies face a fragmented landscape. China is battling deflationary pressures, with the People's Bank of China (PBOC) deploying interest rate cuts and fiscal measures—such as consumer trade-in schemes—to stimulate domestic demand and stabilize the property sector Asia’s Central Banks Face a Formidable Challenge, CNBC^[2]. However, analysts like Ken Peng of Citi Wealth argue that long-term government bond issuance would be more effective than further monetary easing.

Japan continues to struggle with inflation that has exceeded its 2% target for over 32 months, despite a weak yen driving imported inflation. The Bank of Japan (BOJ) has spent significant resources to stabilize the yen in 2024 and is expected to raise rates gradually in 2025 Asia’s Central Banks Face a Formidable Challenge, CNBC^[2]. Meanwhile, India faces a delicate balancing act: the Reserve Bank of India (RBI) held rates steady in December 2024 amid a divided vote, as the rupee hit record lows against the dollar and inflation neared the central bank's upper threshold Asia’s Central Banks Face a Formidable Challenge, CNBC^[2].

Equity Rotation Dynamics

These divergences are reshaping global equity flows. U.S. equities, particularly in sectors tied to domestic consumption and technology, have attracted inflows due to stronger growth and policy predictability. Conversely, Asian markets face headwinds from currency depreciation, policy uncertainty, and uneven growth trajectories. For instance, Japan's equity market remains vulnerable to yen fluctuations, while India's market is caught between inflationary pressures and growth aspirations.

Investors are also factoring in global policy risks, such as the impact of U.S. elections on trade and fiscal policy, and the potential for further central bank divergence in 2025 Global Economic Outlook, January 2025, Deloitte^[1]. This environment favors a strategic rotation toward U.S. assets, though opportunities may emerge in Asia if policy interventions succeed in stabilizing growth and inflation.

Conclusion

The 2025 equity rotation between U.S. and Asian markets hinges on the ability of central banks to navigate divergent economic challenges. While the U.S. offers a relatively stable macroeconomic backdrop, Asian economies must contend with complex trade-offs between growth and inflation. Investors should remain agile, prioritizing U.S. equities in the near term while monitoring policy developments in Asia for potential turning points.