2024 had a familiar feel for investors: the dominance of technology, the US market and a narrow focus on AI. However, in the final months of the year, there was a change of mood. Investors were willing to look further afield for growth, while markets were also weighing up the impact of Donald Trump’s return to the White House. This may have implications for Asian markets in the year ahead.

An important question for 2025 will be whether investors continue to look further afield for growth, with market leadership broadening out from the US technology giants. The US market has been the easy option for growth investors in recent years, but the price for that growth has edged higher and valuations now look stretched.

If investors start to rethink, Asia would be a natural hunting ground. It also has beneficiaries of the AI juggernaut, such as TSMC, alongside other technology behemoths such as Tencent. It also has a far greater share of the technology and AI supply chain. We hold Sunonwealth Electric Machine Industry, for example, which makes the cooling fans for datacentres, as well as Accton which makes the logic switches for AI chips. These options are generally available at more reasonable prices than their US equivalents.

But Asia is far more than just an alternative play on AI. There are broader growth themes across the region, as might be expected in a region where economic growth is the highest in the world. Asia delivered approximately 60% of global growth in 2024 and this is forecast to continue. This is supported by a demographic dividend, with working age populations growing in many countries across Asia. That points to increased productivity and higher economic growth.

We find opportunities across green energy, such as Power Grid of India, or consumer growth, such as insurance group AIA. Also, retail banks provide a good way for us to invest in the economic growth of Asian markets whilst collecting good dividends. We own DBS for example, a Singapore-listed bank, with operations across South East Asia which supports earnings growth and also pays close to 5% dividend yield. More importantly – and unlike other regions – as income investors, we don’t have to sacrifice growth. High quality growth companies such as TSMC, Tencent and Power Grid all paying growing dividends to their shareholders and our highest sector weighting is in technology.

The tariff conundrum

The tariff question will be important for Asian investors in the year ahead. Donald Trump has threatened to impose tariffs on US imported goods, and Asia, particularly China, is a potential casualty of that agenda. Tariffs are likely to be just a bargaining chip and therefore it is impossible to predict the ultimate outcome of Trump’s tariff regime with any certainty. Nevertheless, we believe it is likely to drive intra-Asian trade, as companies seek to insulate themselves against an unpredictable US regime.

This is likely to be seen in greater trade localisation and diversification of supply chains. Against this backdrop, we hold SITC, a Hong Kong listed intra-Asia focused shipping company. The trade war uncertainty has worked in its favour in recent years, and it has paid bumper dividends. The company has been very disciplined about returning excess cash to shareholders as special dividends when the freight cycle works in its favour.

China revival on the cards?

The tariff problems may influence the revival – or otherwise – of China. The government announced a significant stimulus package in November, with the aim of boosting the country’s property market and supporting consumer confidence. However, China is likely to be the prime target of any US tariff regime, and it may be that more stimulus is needed to counter its effects.

The picture remains uncertain. Our fund has a natural underweight position in China because Chinese companies have historically been less inclined to pay dividends and so our focus has been more on markets such as Taiwan, Singapore and Australia, which are the highest yield markets in the region.

However, following the Chinese equity market correction over the past two years, we are increasingly finding more dividend opportunities there. For example, we have held a Chinese property company for the past decade - China Resources Land. This company funds a very conservative development pipeline with the cashflows from its investment properties portfolio. It has been a far more stable choice over the past ten years than some of its higher leveraged peers. It runs a prudent balance sheet, pays a 6% dividend and may provide some exposure to any recovery in the Chinese economy. More recently, we added to internet company Tencent, white goods manufacturer Midea, and China Construction Bank on the back of improved dividend policies.

Dividend sustainability

Dividend sustainability is always an important consideration for us, but we believe it should be a greater priority for investors in the year ahead. In some regions, companies have taken on significant debt and dividend cover may be impacted as a result. Asian companies compare favourably for balance sheet strength relative to their peers in different regions, particularly in the US and Europe. These stronger balance sheets provide company management with greater flexibility to run their businesses through different market cycles.

Asian companies also have strong free cashflow generation, which supports longer-term dividend and buyback payouts. A combination of prudent debt levels and good cashflow generation is a strong backdrop for income investors. More than half of the companies in the Asia Pacific ex Japan region are yielding more than 2.5% in dividends.

There are complex forces at work as we look into 2025. However, we believe Asia is in a far stronger position than other regions, with compelling economic growth, plus companies that are generating cash, with strong balance sheets. In our view, it is far easier to balance growth and income in a portfolio of carefully selected Asian equities than elsewhere. We welcome 2025 with optimism.

Important information

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Risk factors you should consider prior to investing:

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

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