Where are Asian indices headed with US tariffs: Hang Seng Index, Straits Times Index, Nikkei 225

How have Asian indices perform this year?

Asian equity markets have had a divergent start to 2025, with market participants having to navigate US tariff uncertainties, rising recession risks in the US, and shifting domestic policies, which have driven mixed performance across the region.

Chinese equities have emerged as the frontrunner, benefitting from investors’ hunt for value, artificial intelligence (AI) advancement uplifting its tech sector’s earnings estimates, government’s reaffirmation for policy support and a relatively restrained response to US tariffs, which has helped ease escalation concerns.

The Hang Seng Index (HSI) is up 19.2% year-to-date, while the Straits Times Index (STI) has posted a modest gain of 3.9%. Meanwhile, Japan’s Nikkei 225 and Australia’s ASX have struggled, posting declines of -5.7% and -2.7%, respectively. Overall foreign investor sentiment toward Asian equities remain tepid, with US tariffs posing as a key overhang. Net outflows in the region have resumed since the start of the year. Notably, according to Refinitiv data, Taiwan, India, and South Korea saw significant foreign selling in February, amounting to $5.05 billion, $3.98 billion, and $2.85 billion, respectively.

Looking ahead, US tariffs remain a critical headwind for the region to navigate. Any slowdown in trade could weigh on Asia’s export-driven economies, while shifting supply chains may complicate investment flows. Even economies that avoid direct US tariffs may have to face secondary impacts from soft Chinese demand, given that China is unlikely to escape US trade pressures. With these challenges in mind, investors are left wondering: Where are Asian indices headed next?

How may China respond to further US tariffs?

In the face of US tariffs, China is likely to maintain its measured response to avoid escalating tensions, given that its economy is just beginning to stabilise. This suggests that Chinese authorities will likely focus more on internal policy support in the short term to cushion the impact of US tariffs, while accelerating efforts to diversify trade relations with other markets over the long run. The lessons learned from the 2018 trade war, which saw escalation triggering a more aggressive US response, may reinforce this cautious approach, with the understanding that a full-scale trade confrontation could further complicate its economic recovery.

Thus far, China has implemented retaliatory tariffs on US energy and agricultural products, and added 10 US companies to its Unreliable Entity List (UEL)—responses that have been deemed relatively muted in relation to the 20% additional US tariffs. This cautious stance is likely to persist, and having reaffirmed a 5% gross domestic product (GDP) growth target for 2025, expectations are for economic weakness to be well-addressed with more targeted support.

Hang Seng Index (HSI): Broader upward trend likely to remain intact

Upward momentum for the HSI has recently eased, as evidenced by a declining moving average convergence/divergence (MACD) and bearish divergence on the daily relative strength index (RSI). Tariff uncertainties are likely to keep market sentiment in check for now, while improving sentiments around US equities could lead to some capital outflows from Chinese equities, following their strong rally since the beginning of the year.

There may be room for the retracement to extend towards the 22,500 level in the near term, following the breakdown of a secondary upward trendline this week. That said, the broader formation of higher highs and higher lows suggests we will continue to monitor for any signs of a higher low to sustain the upward trend. A key signal would be a reversion in the weekly RSI back to its midline, a level that has historically marked the lows in the index since August 2024.

Straits Times Index (STI) may remain defensive play in the region

Singapore is likely to remain relatively insulated from direct US tariffs, thanks to its strong trade relations with the US. However, indirect effects from key trading partners like China and the Eurozone could still impact the local economy. That said, the outlook is not all doom and gloom. If Singapore avoids direct US tariffs, it could further solidify its position as an attractive regional hub for businesses looking to bypass US tariffs. It may also serve as an alternative source for tariff-impacted goods, helping cushion some broader economic challenges. Risks, however, could arise if the US imposes greater scrutiny on goods flows, which introduce friction into Singapore’s role as a transshipment hub.

At this stage, the overall impact is difficult to gauge, but Singapore may continue to stand out as a defensive play in the region. The STI has demonstrated resilience, reaching a new record high and seemingly leaving the key psychological 4,000 level within reach. An upward channel reflects the prevailing upward trend, with buying-on-dips being the preferred strategy. A pullback to retest the 3,882 level could present an opportunity to form a higher low, with support from both the daily Ichimoku Cloud and the lower channel trendline.

Nikkei 225 still stuck within its broad consolidation pattern

Japan is one of the US' largest trading partners, hence any trade restrictions could significantly hurt demand for Japanese products, especially in industries that are highly sensitive to price increases, like automobiles. However, escalation risks remain limited in our view and both countries are likely to prioritise finding a mutual consensus. This is supported by their long-standing security cooperation and the 2019 US-Japan Trade Agreement, which aims to enhance bilateral trade by reducing tariffs and provide greater market access for US products in Japan. Just last month, Japan promises to buy "record" levels of liquefied natural gas (LNG) from the US in a bid to avoid tariffs, indicating the country’s intent to cooperate.

That said, the potential for an additional rate hike as soon as July, the strength of the Japanese yen, and rising bond yields continue to drive reservations around Japanese equities, keeping the Nikkei index within a broad range. Having recently surpassed a near-term downward trendline resistance, there may be room for further recovery, but a decisive break above the previous support-turned-resistance level at 38,157 could be necessary for sustained upside.