Why investors are looking to Asian stocks to outperform in 2021
The MSCI Asia Pacific index is expected to rise 9% this year, helped by low valuations and a Chinese rebound
After narrowly beating their US peers for the first time in three years in 2020, Asian stocks could see another strong year, analysts say.
Asia’s outperformance is expected to continue in 2021, with cyclicals expected to catch up to technology stocks as optimism over vaccine rollouts grows. Analysts on average predict that the MSCI Asia Pacific index will rise about 9% over the next 12 months, compared with an estimated 8% gain for the S&P 500 Index, Bloomberg surveys show.
A strengthening economic rebound in China as well as Asia’s low valuations relative to the US and Europe are also key positives that are seen helping regional stocks tide over potential risks arising from any fresh virus outbreaks, hurdles in vaccine distribution and worsening of Sino-American relations.
“Asian equities will be the asset class of choice in 2021,” said Gary Dugan, CEO at the Global CIO Office in Singapore. “Growth fundamentals and the ability to rebound quickly as Covid issues clear make the region particularly attractive.”
On Monday the S&P 500 sank the most since late October as investors assessed the possibility of a slower-than-expected economic recovery amid a global surge in Covid-19 infections. Even so, the MSCI Asia Pacific gauge rose 0.2% on Tuesday.
Here are five themes that Asian stock investors say are key to their strategy in 2021:
Green is good
Investing on environmental, social and governance (ESG) grounds should reap benefits thanks to a slew of favourable government policies. Take renewable energy for instance. China, Japan and South Korea are all pushing to become carbon neutral this century, while the US is preparing for a climate-friendly president to take over.
“Renewable energy has never been cheaper,” said David Smith, a portfolio manager at Aberdeen Standard Investments Asia. “China’s recent pledge to be a net zero emitter of greenhouse gases by 2060 has added impetus to the case.”
Stocks linked to solar and wind energy could get a boost as China upgrades its climate goals. Meanwhile, India plans to have 40% of its power generation coming from non-fossil sources by the end of the decade, which should help companies in that space.
Electric vehicles are still hot. BNP Paribas’s Energy Transition fund is among those betting on stocks in the electric-vehicle supply chain, which includes Korean battery makers such as LG Chem and firms involved with hydrogen fuel cell technology. Japan’s vehicle makers are in focus as the country prepares to phase out new petrol cars by mid-2030s.
It really is value’s turn
Value shares have lagged and recovered time and time again in the past decade, but this time investors are expecting a more robust pickup in stocks that look cheap on measures such as price-to-earnings or price-to-book multiples. Barring widespread lockdowns, the rebound in old-economy stocks that were shunned by investors flocking to pandemic plays like tech and health care is expected to continue.
Investors seeking exposure to companies that will benefit as business activity normalises are picking up banks, industrials and consumer discretionary stocks — heavyweights in the MSCI Asia Pacific index. Funds from BlackRock to UBS Asset Management are touting equities in Southeast Asia and India as part of their recovery trade playbook.
It’s not just sectors that could benefit from rotation into value; cheap markets also stand to gain.
Analysts estimate that Singapore’s Straits Times index, Asia’s worst-performing major national gauge in 2020, could gain 10% over 2021, boosted by the signing of the world’s biggest regional trade pact late last year.
Another market that was shunned but is getting love: Japan. Foreign investors are seen returning to Japan’s cyclical-heavy stock market, bolstered by Warren Buffett’s $6bn bet on the nation’s trading houses and expectations for policy changes under Prime Minister Suga Yoshihide.
Tech is still your friend
That’s not to say tech — the hottest trade of 2020 — is going on the back-burner. The pandemic has accelerated trends such as e-commerce and remote working, which means Taiwanese and Korean chipmakers, internet names in China and data centre stocks are among favourites in the new year.
M&G Investments is among asset managers investing in game-content developers in Japan, South Korea and China. Nintendo, the maker of hit game Animal Crossing, rallied 50% last year while Sony, known for the PlayStation console, was up 39%.
Japan’s tech shares are also set to benefit from the Suga administration’s digital reform agenda aimed at transforming the country’s paper-heavy and inefficient public sector.
That said, there is a caveat to this trend: regulation. China has escalated scrutiny on billionaire Jack Ma’s internet empire, kicking off an investigation into alleged monopolistic practices at Alibaba Group Holding. It also ordered affiliate Ant Group to overhaul its operations.
Worries that antitrust scrutiny will extend beyond Ma’s companies have weighed on shares of Alibaba and its rivals such as Tencent Holdings and food delivery giant Meituan.
Dividend drought should end
Dividend stocks are expected to make a comeback in 2021 as companies loosen their purse strings. Another catalyst is the easing of regulatory curbs placed on payouts by banks to conserve capital amid the pandemic.
Payouts at Australian and Thai lenders could grow after the lifting of related restrictions, and the same goes for dividends at HSBC Holdings and Standard Chartered after the UK eased its ban. Singapore’s banks, which have long had a reputation for being generous with payouts, could be back in play once the country’s regulator follows suit.
Double-digit increases in Asian dividends “are more than possible”, said Mike Kerley, a portfolio manager at Janus Henderson Investors.
Banking isn’t the only space investors are watching here. Material stocks, like Australian miners gaining from a commodity price boom, as well as consumer discretionary stocks may see an increase, said Kerley.
China deleveraging is back
After a string of bond defaults at state-linked firms, China is focusing once again on stabilising debt levels and tightening liquidity in its financial system.
That’s bad news for China’s brokerages — a source of margin financing and a barometer of stock market sentiment. Companies listed on Shenzhen’s tech-heavy ChiNext board and the country’s other small-cap stocks may also face selling pressure as they are vulnerable to liquidity leaving the system.
However, beyond short-term pain, the derisking trend is likely to lead to better asset quality at Chinese banks, giving their shares a boost. Investors will watch for cues on deleveraging plans at China’s annual National People’s Congress meeting in March.
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