Investors Turn to Asian Equities Amid Signs of US Recession

As the U.S. economy shows signs of a potential recession, investors are increasingly turning their attention to Asian equities, which may offer relative stability and growth opportunities amid global economic uncertainties.

Historically, during U.S. recessions, investors have favored U.S. assets as safe havens, often leading to capital outflows from emerging markets. However, current economic indicators suggest a possible shift in this pattern. The U.S. economy contracted by an annualized 0.3% in the first quarter of 2025, marking the first decline since 2022. This downturn is largely attributed to a surge in imports ahead of impending tariffs, contributing to a record-high trade deficit. Economists and former officials caution that these trade policies are undermining growth and could trigger a recession.

In contrast, Asian economies are projected to maintain positive growth trajectories. The Organisation for Economic Co-operation and Development (OECD) forecasts that the U.S. economy will grow by 1.6% in 2025, down from 2.6% in 2024. Meanwhile, the Conference Board projects U.S. GDP growth of 2.3% in 2025, spurred by improving credit conditions and rising stock prices. These projections indicate a slowdown in U.S. economic growth, which may influence investor behavior.

Inflationary trends further differentiate the U.S. and Asian economic landscapes. The U.S. is grappling with rising inflation, exacerbated by tariffs and supply chain disruptions. Conversely, many Asian economies, including China, are experiencing more stable or deflationary conditions. China faces deflation challenges driven by excessive investment and overcapacity, necessitating a shift towards consumption to meet growth targets.

Monetary and fiscal policies also play a crucial role in this dynamic. The U.S. Federal Reserve has limited capacity for interest rate cuts due to persistent inflation, and fiscal stimulus is constrained by high debt levels. In contrast, Asian countries like China, India, Indonesia, and the Philippines have lower debt burdens and more flexibility for monetary and fiscal easing. For instance, India is expected to experience a robust recovery fueled by government capital expenditure, monetary easing, and acceleration in services exports, aiming for a GDP growth trajectory of 6.5%.

Equity valuations further highlight the potential for Asian markets to outperform. Asian equity valuations are currently more modest compared to elevated U.S. valuations, potentially reducing the risk of significant declines in Asian markets. In early 2025, Asian markets have already demonstrated outperformance relative to the U.S., despite geopolitical shocks, indicating a growing investor preference for Asian equities.

Investor behavior reflects this shift. Following the U.S. imposition of sweeping tariffs in April 2025, Asian hedge funds initially pulled back but began re-entering markets, particularly focusing on Japan and India, viewing these countries as safe havens amidst escalating U.S.-China trade tensions. Japan's Nikkei 225 and India's NIFTY 50 were among the first benchmarks to recover, with India's index rising over 3% in April.

While the current environment may position Asian equities as a relative safe haven during a potential U.S. recession, risks remain. China's economic slowdown and trade dependencies pose challenges. Additionally, the ongoing supply chain reorganization suggests growing demand for infrastructure as India develops into another global manufacturing hub, competing with China and ASEAN. This will likely benefit transport and infrastructure assets.

In summary, as the U.S. faces economic headwinds, Asian equities present a compelling alternative for investors seeking stability and growth. The combination of favorable economic forecasts, controlled inflation, flexible policy options, and attractive valuations positions Asian markets as potential outperformers in the face of global economic uncertainties.