Asia Pacific Sector Rotation: Small-Cap Value in Financials/Consumer Discretionary vs. Tech Turnarounds Amid Fed Uncertainty

The Federal Reserve's June 2025 policy signals underscore a cautious balancing act between inflation control and economic growth. With the median federal funds rate projected to remain at 3.9% this year before easing to 3.0% in the long term, uncertainty lingers over the pace of rate cuts and their impact on equity markets. For the AMG Veritas Asia Pacific Fund, this environment demands a strategic sector rotation—one that leverages undervalued small-cap opportunities in Financials and Consumer Discretionary while monitoring Tech's recovery potential. Here's how to navigate it.

Fed Policy Uncertainty: A Catalyst for Sector Rotation

The Fed's June projections reveal elevated inflation risks (PCE at 3.0% in 2025 vs. 2.7% in March) and a slightly downgraded GDP outlook (1.4% in 2025). With 14 of 25 FOMC participants citing upside inflation risks, the path to rate cuts remains fraught. This uncertainty creates a tailwind for defensive strategies, favoring sectors with pricing power or exposure to domestic demand.

For Asia Pacific investors, this means prioritizing small-cap value stocks in Financials and Consumer Discretionary—sectors historically sensitive to cyclical recovery and less leveraged to global trade headwinds. Concurrently, Tech's recovery hinges on innovation-driven demand, such as AI infrastructure, which could offset macroeconomic volatility.

Small-Cap Financials: Value Misplaced, but Insider Activity Signals Confidence

Asia Pacific small-cap Financials, particularly real estate investment trusts (REITs), are trading at steep discounts due to trade policy risks and inflation concerns. Yet, select firms are showing resilience through strategic moves:

1. Spring Real Estate Investment Trust (SEHK:1426):
2. Valuation: P/E of -48.9x (negative earnings due to non-operating expenses), but a buyback program initiated in June 2025 aims to boost net asset value.

3. Outlook: Despite a 6.64% net income margin decline, insider buying and its focus on Tier I/II Chinese commercial properties position it to benefit from urbanization trends.

4. Charter Hall Retail REIT (ASX:CQR):

5. Valuation: P/E of 13.7x, with a dividend yield of 4.8% despite projected 0.3% annual earnings declines.

6. Catalyst: New board leadership and Australia's accommodative fiscal policies support its convenience retail portfolio.

7. MREIT (PSE:MREIT):

8. Valuation: P/E of 12.2x, with Q1 2025 net income surging 230% YoY.
9. Growth: Philippine infrastructure spending and Megaworld's sustainable development framework drive demand for its office and residential assets.

Investment Play: Overweight REITs with strong balance sheets and insider support. Avoid those reliant on external borrowing in volatile markets.

Consumer Discretionary: Underweight, but Undervalued

The sector is downgraded to "underweight" due to inflation's bite on consumer spending. However, pockets of opportunity exist in domestically focused businesses:

• China's Tier II cities: Retailers like Suning Holdings (SZ:002024) are benefiting from urbanization and government subsidies for local consumption.
• Philippines' e-commerce: Shopee Philippines (backed by Sea Group) leverages rising digital adoption, with P/E multiples at 1.2x below regional peers.

Risk: U.S.-China trade tensions could delay recovery. Monitor earnings revisions closely.

Tech Turnaround: Cloud and AI Drive Selective Opportunities

While Asia Pacific Tech faces headwinds from high valuations and U.S. tariffs, innovation in AI and cloud infrastructure is creating inflection points:

1. Micron Technology (MU):
2. Catalyst: HBM (High-Bandwidth Memory) adoption in AI and HPC is driving a 153% YoY earnings surge in Q2 2025.

3. Asia Exposure: Taiwan's Nan Ya Printed Circuit Board (TW:2328) supplies critical components for Micron's products.

4. Oracle (ORCL):

5. Growth: Cloud IaaS revenue hit $3.0 billion (+52% YoY), with FY2026 targets of >40% growth.
6. Regional Play: Its partnerships with Indian and Southeast Asian enterprises position it to capitalize on digital transformation.

Investment Play: Focus on Tech leaders with structural growth (e.g., Oracle's cloud dominance) rather than cyclical hardware firms.

Sector Rotation Strategy for the AMG Veritas Fund

1. Rotate into Financials/Consumer Discretionary Small-Caps:
2. Buy: MREIT (PSE:MREIT) for its earnings rebound and Philippine infrastructure tailwinds.

3. Hold: Spring REIT (SEHK:1426) for its buyback program and urbanization exposure.

4. Monitor Tech Turnarounds Selectively:

5. Watch: Nan Ya Printed Circuit Board (TW:2328) for HBM-driven demand.

6. Avoid: Tariff-sensitive firms like FedEx (FDX) unless logistics bottlenecks ease.

7. Hedging Against Fed Uncertainty:

8. Allocate 10–15% of the portfolio to high-dividend REITs (e.g., Charter Hall) to buffer against rate volatility.

Final Call: Value Over Growth, but Stay Nimble

Asia Pacific's small-cap value stocks in Financials and Consumer Discretionary offer asymmetric returns, especially if Fed rate cuts materialize. Tech's recovery is sector-specific—prioritize AI/cloud innovators over commodity players.

Risk Alert: If Q3 2025 inflation exceeds Fed forecasts, rotate into defensive sectors like Healthcare or Utilities.

In this uncertain environment, the AMG Veritas Fund should lean into structural trends while hedging macro risks. The payoff? Capturing the upside of Asia's recovery without overexposure to Fed policy whiplash.