Lighting equipment at the Guangzhou 2020 International Live Streaming Industry Expo on December 27, 2020.
Photographer: VCG via Getty Images
Photographer: VCG via Getty Images
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After a sip by beating their US competitors for the first time in three years in 2020, Asian stocks could see another strong year, analysts say.
Asia’s outperformance continues into 2021, with cyclical stocks expected to catch on until technology shares as optimism about vaccine rollout grows. On average, analysts predict that the MSCI Asia Pacific Index will rise about 9% over the next 12 months, compared to an estimated 8% rise for the S&P 500 Index, according to Bloomberg research.
A stronger economic recovery in China and the low valuations of Asia compared to the US and Europe are also important positives that help regional stocks overcome potential risks posed by new virus outbreaks, barriers in vaccine distribution and deterioration in Chinese American relations.
“Asian equities will be the asset class of choice in 2021,” said Gary Dugan, CEO of the Global CIO Office in Singapore. “Growth foundations and the ability to recover quickly if Covid problems become apparent make the region particularly attractive.”
The S&P 500 sunk the most Monday since late October when investors assessed the possibility of a slower-than-expected economic recovery amid a global surge in Covid-19 infections. Still, the MSCI Asia Pacific meter rose 0.2% on Tuesday.
Here are five themes that Asian equity investors believe will be key to their strategy in 2021:
Green is good
Investing on environmental, social and governance grounds should pay off, thanks to a lot of favorable government policies.
Take renewable energy, for example. China, Japan and Korea are all trying to become Carbon neutral this century as the US prepares to take over a climate-friendly president.
“Renewable energy has never been cheaper,” said David Smith, portfolio manager at Aberdeen Standard Investments Asia. “China’s recent pledge to have net zero greenhouse gas emissions by 2060 has further boosted the matter.”
Stocks linked to solar and wind power could get a boost like China upgrades its climate goals. Meanwhile, India plans to have 40% of its power generation come from non-fossil sources by the end of the decade, which should help businesses in that space.
Electric vehicles are still hot. The BNP Paribas Energy Transition Fund is one of them betting on stocks in the electric vehicle supply chain, including Korean battery manufacturers such as LG Chem Ltd. and companies involved in hydrogen fuel cell technology. Japanese auto stocks are in focus as the country prepares for it phasing out new petrol cars in the mid-2030s.
It is really Value’s turn
Value stocks have lagged and rebounded time and time again over the past decade, but this time investors are expecting a more powerful rebound in stocks that look cheap based on measures such as price-earnings ratio or price-book multiples. Barring widespread lockdowns, the recovery of stocks from the old economy that were shunned by investors flocking to pandemics such as tech and healthcare is expected to continue.
Investors seeking exposure to companies that will benefit as business activity normalizes include banks, industrials and consumer discretionary – heavyweights in the MSCI Asia Pacific index. Funds from BlackRock Inc. to UBS Asset Management stocks in Southeast Asia and India as part of their recovery trade book.
It’s not just industries that can benefit from rotation for value; cheap markets also have to gain.
Analysts estimate Singapore’s Straits Times Index, last year’s worst performing major national gauge in Asia, could rise 10% from 2021, boosted by the signing of the world’s largest regional trade pact at the end of last year.
Another market that has been shunned but is getting love: Japan. Foreign investors are seen return to Japan’s cyclical stock market, bolstered by Warren Buffett’s $ 6 billion betting on the nation’s trading houses and expectations for policy changes under Prime Minister Yoshihide Suga.
Here are the 2020 Japanese stock market winners and losers
Tech is still your friend
That’s not to say technology – the hottest trade of 2020 – is on the back burner. The pandemic has accelerated trends such as e-commerce and remote working, meaning Taiwanese and Korean chip makers, internet names in China and data center stocks are among the favorites in the new year.
M&G Investments is one of the asset managers invest in game content developers in Japan, Korea and China. Nintendo Co., the creator of the hit game Animal Crossing, was up 50% last year, while Sony Corp., known for the Playstation console, was up 39%.
Japan’s technical stocks are also set to take advantage of the Suga government’s digital reform agenda that aims to transform the country’s paper-heavy and inefficient public sector.
That said, there is one caveat to this trend: regulation. China has escalated control of billionaire Jack Ma’s internet empire, launched an investigation into alleged monopolistic practices at Alibaba Group Holding Ltd., and also affiliated with Ant Group Co. overhaul of its operations.
Ensuring that antitrust investigation will do Going beyond Ma’s companies have weighed in on shares of Alibaba and its rivals such as Tencent Holdings Ltd. and food delivery giant Meituan.
China fines Alibaba, Tencent Unit under anti-monopoly laws
Dividend drought should end
Dividend stocks are expected to make a comeback in 2021 as companies loosen their wallets. Another catalyst is easing regulatory restrictions on bank disbursements to preserve capital during the pandemic.
Payouts on Australian and Thai lenders could grow after the removal of related restrictions as well as dividends from HSBC Holdings Plc and Post UK Standard Chartered Plc relaxed his ban. Singapore’s banks, which have long had a reputation for being generous with payouts, could be back in the game once it’s off the country 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 looking here. Tangible stocks, such as Australian miners benefiting from a surge in commodity prices, and consumer consumer goods could soar, Kerley said.
Debt reduction in China is back
After a long bond defaults at state-related companies, China is refocusing on stabilizing debt levels and tightening liquidity in its financial system.
That’s bad news for Chinese brokers – a source of margin funding 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 exiting the system.
China is telling inefficient companies to harden up or prepare to fail
But in the short term pain, the declining trend is likely to lead to better asset quality in Chinese banks, boosting their stocks. Investors will watch for clues about debt reduction plans at the annual meeting of the National People’s Congress in China in March.
– With the help of Amanda Wang and Sofia Horta e Costa
(Updates estimates in the second paragraph, the Asia index performance in the fifth paragraph.)