Although uncertainties brought by tariffs will remain a key theme, we expect companies to demonstrate their resilience through various forms of tariff risk mitigation.
In Brief
- 1Q25 Asian earnings are tracking a modest pace of growth, though broadly better than consensus expectations.
- Tariff uncertainties are a key theme in earnings calls, though companies continued to demonstrate their resilience amidst these challenges through various forms of tariff risk mitigation.
- Valuations on Asian equities are undemanding, complementing developed market equities allocations and offering a source of diversification in investment portfolios.
The year-to-date outperformance of Asian equities relative to U.S. equities has left markets wondering if there is more to the recent strength than a weaker U.S. dollar, capital repatriation from U.S. markets, and hopes for a resolution to trade tensions. With nearly half of the MSCI AC Asia Pacific index’s market cap reported 1Q25 earnings, we explore how management guidance is shifting amidst tariff uncertainty, recap on the past quarter’s performance, and discuss the outlook ahead.
At the index level, results have been mixed. Reported earnings show a modest 2.4% year-over-year (y/y) increase, though slightly better than consensus estimates at a 33%-to-23% beat-to-miss ratio.
Unwavering corporate reforms in Japan
In Japan, 1Q earnings grew 2.5% y/y for the 58% market cap reported. Profits were generally weaker for autos and other foreign-demand orientated sectors. Notably, management from these sectors were expectedly cautious on their FY2025 guidance, with most already factoring in the impacts of tariffs under their cost of goods sold assumption. However, there is a wide range of assumptions adopted across companies, when it comes to the duration and magnitude of tariff implementation, highlighting the wide uncertainty of Japanese corporates.
Tariffs have not slowed down progress on corporate reforms. In fact, the amount of share buybacks announced in the first fiscal month was more than double the same period in the prior year (Exhibit 1), as Japanese companies demonstrate their resilience amidst these challenges and commitment to managing excess cash in the balance sheet. With pressure from activist investors and markets continue to increase, share buybacks are on track to set another record high year, underpinning the long-term benefits for shareholder returns.
Tariff-led front-loading in Korea
In Korea, over 80% of its market cap have reported, with 1Q earnings tracking at 23.6% y/y growth. Leading technology names, in particular, reported strong above-consensus revenue and profit growth over the quarter across the memory component space. This is likely due to a combination of inventory restocking, lower Chinese conventional memory supply and front-loading of demand ahead of tariff hikes. While management had flagged front-loading’s downside risk to 2H25 conventional memory shipments, in addition to acknowledging the difficulty to assess potential tariff impacts, expected impact on high bandwidth memory (HBM) sales are relatively limited with no changes to guidance, as the artificial intelligence (AI)-driven HBM up-cycle continues. This should accelerate the industry to shift the revenue mix towards HBM, and may benefit companies with a higher HBM portion in their product mix, abundant in Korean markets.
A balancing act in India
In India, earnings over 1Q increased 10.6% y/y for the 68% of market cap reported. Financials, the largest sector for Indian equities in the index, had leading names beat on reported earnings over the quarter. Net interest margins were higher versus last quarter, due to growth in higher yielding segments (e.g. retail non-mortgage lending), offset by the higher cost of funds. Consolidation remains a broad theme, with most banks noting a lower loan-to-deposit ratio as deposit growth outpaced credit growth. While moderating credit growth has meant lower income, the bottom line is that asset quality improved further over the quarter, in part due to sales of non-performing assets and seasonality effect of lower agricultural slippages.
The start of India’s monetary easing cycle likely meant added net interest margin pressure from floating rate loans. Any policy rate cut sharper than what is priced by markets could be a major headwind to the sector. However, the central bank’s recent change to a lower run-off rate for loan-coverage ratio calculations (from 100% to 40% on non-financial deposits) should help to protect margins, a net positive for the sector. Along with positive takeaway on resilient assets, the region’s lower reliance on exports to U.S. also provide a relative opportunity against other regions’ financial sector in terms of potential tariff-impact to asset quality.
Chinese credit expansion, margin compression
In China, only a few industries have reported for the quarter, at 39% of the index market cap. One of which are banks, where earnings were either at or below estimates across the larger names, as net interest margin narrowed over the quarter with loan rate repricing the most cited reason and most banks expecting continued margin pressure. This led to declining net interest income in 1Q, despite some cushioning from decent loan growth. Asset quality remains resilient, with non-performing loan ratios seeing no change to 2bps improvement and stable coverage ratios over the quarter.
Guidance continues to point to a focus on credit expansion but interest margin compression (Exhibit 2). This mirrors the recent People's Bank of China announcement that targets a lower interest rate and higher credit growth.
While earnings misses had led to some concerns over Chinese banks’ dividend stability, current guidance mostly signaled maintaining a steady dividend payout ratio, marking this segment still an ideal candidate for high dividend strategies. Furthermore, given limited direct business with the U.S., management guidance generally appeared less concerned over tariffs risks, with most expecting domestic supportive measures to help alleviate tariff impact on macro growth.
Investment implications
Other key segments, such as Chinese platform names and Japanese banks, are due to report in the weeks ahead, broadening out the earnings outlook. Although uncertainties brought by tariffs will undoubtedly remain a key theme throughout upcoming earnings calls, management guidance and policy outlook, we expect companies to similarly demonstrate their resilience amidst these challenges through various forms of tariff risk mitigation, aided by a structural corporate governance tailwind, leadership in AI advancement and supportive domestic policies.
At a forward price-to-earnings ratio of 13.6x, valuations on Asian equities continue to screen as undemanding relative to historical averages, offering investors a cheaper complement and diversification to developed market equities in their investment portfolios.