Asia's Domestic Stocks: A Tale of Divergence and Opportunity

The first quarter of 2025 has revealed a stark divergence in the performance of Asian domestic-oriented stocks, with China surging ahead while Japan and India face headwinds. According to JPMorgan Asset Management’s recent analysis, this split underscores the critical role of policy responses, external trade dynamics, and structural reforms in shaping investment outcomes. Let’s dissect the key takeaways.

China: Policy-Fueled Outperformance, but Risks Linger

Chinese domestic stocks led the pack, rising 15% year-to-date through Q1 2025. Three factors drove this rebound:
1. U.S. Tariffs Were Less Punitive Than Feared: Reduced trade tensions eased investor anxiety.
2. AI Breakthroughs Ignited Tech Sentiment: DeepSeek’s January AI advancements signaled China’s tech prowess, boosting confidence in domestic innovation.
3. Policy Support: Beijing’s fiscal measures for manufacturing and infrastructure, along with RMB300 billion in funding to address the property crisis, provided critical tailwinds.

Yet, challenges remain. Domestic consumption remains weak, and the property sector—still contracting at double-digit rates—threatens broader recovery. JPMorgan warns that policy execution will be key: “Valuations are cheap, but long-term success hinges on stabilizing real estate and reigniting consumer demand.”

Japan: Stagnation Amid Structural Strength

Japanese equities faced a rough patch, with the Nikkei 225 Index flat in early Q2. The stronger yen (driven by narrowing U.S.-Japan rate gaps) hurt exporters, while inflation and weak wage growth dampened domestic consumption. Despite these headwinds, corporate fundamentals held up:
- Profit Growth: Double-digit earnings rose, but companies tempered guidance due to rising costs.
- Governance Reforms: Over 70% of Tokyo Stock Exchange Prime firms disclosed governance improvements, shifting investor focus to quality over quantity.

The Bank of Japan’s (BoJ) gradual policy normalization—expected to raise rates to 0.25% by July .25% by July 2025—adds uncertainty. JPMorgan notes, “Structural reforms in productivity and capital efficiency justify optimism, but near-term risks like yen volatility demand caution.”

India: Lagging Without Clear Catalysts

Indian domestic stocks underperformed, dropping 2.9% year-to-date, though JPMorgan’s analysis offers little clarity on specific drivers. The report attributes this to broader regional dispersion rather than domestic policy failures. With inflation and interest rate pressures still elevated, India’s recovery may depend on global commodity trends and local fiscal adjustments.

Regional Divergence: Where to Invest?

The Q1 data highlights a stark contrast:
- China’s Strength: Policy stimulus and external demand are offsetting weak domestic consumption. Investors should focus on sectors like infrastructure, tech (AI-driven firms), and companies with strong balance sheets.
- Japan’s Caution: Structural reforms and productivity gains are positive, but near-term risks from yen weakness and inflation require a selective approach.
- India’s Uncertainty: Diversification into cyclical sectors (e.g., financials, industrials) could pay off if policy clarity emerges.

Conclusion: Diversify, Prioritize Quality

JPMorgan’s analysis leaves one clear takeaway: Asia’s domestic stocks are not a monolith. China’s outperformance is policy-dependent, Japan’s recovery hinges on inflation and currency stability, and India needs catalysts to catch up.

Investors should:
1. Overweight China’s private-sector firms with strong margins and exposure to AI/infrastructure.
2. Underweight Japan’s export-reliant stocks but favor companies benefiting from productivity gains.
3. Use India selectively, focusing on sectors tied to fiscal reforms and global commodity trends.

The data underscores the need for diversification and quality over quantity. As JPMorgan concludes, “Navigating Asia’s divergence requires a nuanced strategy—monitoring policy execution, geopolitical risks, and corporate fundamentals to capitalize on volatility.”

In short, Asia’s domestic stocks offer opportunities, but investors must pick their spots wisely. The region’s growth story isn’t dead—it’s just unevenly distributed.

Data as of Q1 2025. Past performance does not guarantee future results.