The end of 2024 is approaching, and the global landscape of the financial markets has been unpredictable, particularly in the Asia-Pacific region, showing a surprising resilience despite facing numerous challenges throughout the yearFollowing a long-awaited interest rate cut by the Federal Reserve, the significant fluctuations caused by U.S. economic slowdown speculations, and a tightening global market due to rising dollar impacts, the performance of Asia-Pacific stocks tells a different storyAside from South Korea and Indonesia, most major stock indices in the Asia-Pacific region have recorded positive growth for the year.

As we approach the last trading day of the year, the Asia-Pacific markets are grappling with some weight, following the downward trend set by U.S. equitiesOn December 31, as reported by the latest financial news, U.S. indices marked their third consecutive day of losses, primarily due to a downturn in tech stocksThe MSCI Asia-Pacific index, benefiting all year from overall positive sentiment, now faces its first quarterly decline of the year in the fourth quarterEarly trading saw Australia’s S&P/ASX 200 index decrease by around 0.7%, while markets in Japan and South Korea remained closed in observance of holidaysInterestingly, South Korea's consumer inflation rate for December showed a year-on-year increase of 1.9%, higher than the November figure of 1.5%.

Reflecting on the broader picture, the Asia-Pacific main stock indices are concluding 2024 on a relatively high note due to several factorsPrimarily, the central banks in the region have adopted more accommodative monetary policies, further buoyed by the thriving AI industry which has significantly boosted technology sharesConsequently, most Asia-Pacific stock indices have shown substantial gains throughout the yearNotably, Nathan, an executive at Financiere de L Echiquier, labeled TSMC as the best way to translate AI themes into reasonable valuationsThe anticipated CES showcase next month in Las Vegas by Nvidia and the earnings release expected from TSMC are positioned as key catalysts ahead

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Market predictions suggest that TSMC's quarterly earnings could grow by an impressive 36%, with gross margins reaching 58.3%, which would mark the highest level since 2022.

Furthermore, a report from DBS Bank posits a slightly cautious outlook for demand in AI-related data centers and servers, predicting a potential slowdown post the year’s robust growthHowever, the report foresees an uptick in demand for consumer electronics supporting AI—such as smartphones, PCs, and other gadgets—as we move into 2025. The semiconductor industry, traditionally experiencing an expansion cycle lasting approximately 30 months, is currently in a cycle that began around September 2023 and is projected to extend through the end of 2025.

In contrast, the South Korean market, emblematic of certain vulnerabilities within the region, has found it challenging to maintain momentum despite global tech strengthThe Korea Composite Stock Price Index (KOSPI) has plummeted by about 8.03% this year, making it the worst-performing major Asian indexThe government’s 'corporate value enhancement strategy' has struggled to invigorate the stock market, compounded by trade tariff worries and a politically tumultuous environment that heightens uncertaintyAnalysts from Eastspring Investments highlight that South Korea's export-driven economy is heavily influenced by major economies, notably the U.S. and ChinaKey exports such as technology hardware and automotive products may face tough headwindsNonetheless, there is a silver lining as government measures on regulatory reforms and potential fiscal stimuli, alongside further interest rate cuts by the Bank of Korea, could help ameliorate local business conditions, thus invigorating domestic demand.

Yet, the immediate influence of the South Korean government appears subduedThe impeachment processes against President Yoon have undeniably strained investor confidenceRecent statistics released on December 24 illustrate a significant drop in consumer confidence, being the steepest decline since the pandemic started

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As warned by Tim, head of Asian equity research at Morningstar, the longer the leadership transition in South Korea drags on, the more likely the South Korean market will find itself on the periphery of investment interest.

According to data from the London Stock Exchange, other Asia-Pacific indices have exhibited promising results, with Singapore's Straits Times Index and Japan's Nikkei 225 boasting year-end increases of 15.78% and 15.65% respectively, ranking third and fourth among major indicesThe CSI 300 Index has broken a three-year streak of losses, rising by 14.64% this yearAlso registering positive growth are the Malaysia Kuala Lumpur Composite Index, Indian Nifty 50, Indian BSE Sensex, and Australia's ASX 200 with annual gains of 9.73%, 9.28%, 8.69%, and 8.05% respectivelyOnly the Jakarta Composite Index in Indonesia mirrored South Korea's performance, yielding a decrease of 2.42%.

Looking ahead to 2025, several crucial elements are poised to shape the Asia-Pacific marketsChief Investment Officer and head of global equities at Shenfield Asset Management, said that U.S. policies will remain a significant determinantCurrently, concerns stemming from tariff policies and a robust dollar are on the riseDespite a collection of impressive annual returns, the MSCI Asian Index now braces for its first quarterly loss since September 2023, reflecting a drop of approximately 6.9%, while the S&P 500 has noted a contrary uptick of 3.7% over the same period.

Nomura Secured observes that the policies corresponding to the new tariff era could dominate the growth and inflation outlook for Asia in 2025. Early indications of increased tariffs point to heightened inflationary pressures across the region and a probable pullback in investment growthTrade barriers and escalated uncertainty may stall business investments furtherAdding to the existential challenges, external financial conditions could tighten as Asian economies must grapple with prolonged higher interest rates and a strong dollar.

In a concluding statement during its last meeting of 2024, the Federal Reserve signaled it would reduce the scope of interest rate cuts in 2025 while raising inflation forecasts

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Nomura expects a divergence in monetary policy across Asia, where nations like Australia, South Korea, and Indonesia, more susceptible to currency risks, may pursue monetary easing, while countries such as Japan and Malaysia—characterized by robust growth and higher inflation—will likely implement hikesThough the prevalent demand for AI and strong exports may bolster growth in the first quarter, challenges are anticipated as the new tariff regime and a cooling semiconductor cycle could complicate matters for Asia, particularly in the second half of the year.

Nevertheless, several institutions maintain a buoyant outlookMike Shiao, Chief Investment Officer at Invesco Asia (excluding Japan), remarked on the region’s swift deflationary progress compared to other global markets, enhancing the viability of monetary relaxationWith the Federal Reserve entering a phase of easing, Asian economies are positioned for more significant cuts in 2025, typically supportive of equity ralliesHe added that from a valuation perspective, the Asian market, deemed attractive, holds a forward P/E ratio of 13.1—as per the past twelve months—lower than the historical average by one standard deviationWhen contrasted with developed markets, excluding Japan, Asian equities are approximately 39% discountedProminent earnings growth potential in Asian enterprises fuels optimistic expectations that EPS growth could exceed double digits in this sector over the next year, subsequently enhancing profitability and returns on equity in an improved economic environment.

Meanwhile, the Chief Investment Strategist for HSBC Global Private Banking and Wealth Management in China, expressed growing optimism regarding Asian market prospectsExpectations remain high for robust growth from India and ASEAN countries, paired with China's ongoing economic stimulus measures, positioning the region—excluding Japan—for a projected 4.4% growth rate in 2025, significantly outpacing the global average growth forecast of 2.6%. The Fed's easing cycle thus presents further leeway for Asian central banks to execute rate cuts, enhancing the appeal of Asian equity profiles.

Moreover, some analysts anticipate an expansion of positive momentum across sectors

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