At a glance
After a historic year—in the scale of the health crisis, the worldwide lockdowns, the equity market swings, the amount of policy support issued—the question is what’s in store for us in 2021. Vaccine progress continues, policy remains extremely supportive, and the regional and global economies are on the mend.
For 2021, we forecast 7%-7.5% GDP growth for Asia ex-Japan (from –2.1% y/y in 2020) and robust mid-teens upside for the region’s stock markets. Looking longer term, four trends stand out: technological transformation across economies and industries; a tougher “hunt for yield” amid ultra-low rates; the transformation of Asia’s green economy, powered by China’s carbon-neutral pledge; and the pandemic’s impact on real estate.
Outlook 2021 and investment implications
After an economically challenging 2020, all signs are pointing to a buoyant year for equity markets, especially in markets and sectors that have yet to price in greater economic normalization. Southeast Asia is climbing out of recession and returning to growth, and with a return to “normal” life around the corner, cyclical sectors and markets that have suffered this year are poised to bounce back. Our economists forecast 7%-7.5% GDP growth for Asia ex-Japan in 2021 (from –2.1% y/y in 2020), with a cyclical rebound powering consumption and lifting economies back to their pre-pandemic levels.
Overall, we see robust mid-teens upside for the region’s stock markets in 2021. In fact, 2021 could be another “2017” in the making, with a sharp rebound in operating margins and cash flows supporting equities. A major risk factor for the region—US-China tensions—may also be eased with President-elect Biden in power.
But as 2020 has shown us, it’s still imperative to prepare for tail risks. So we recommend diversifying exposure with assets like gold. With recent vaccine developments pointing to a faster post-pandemic normalization than expected, we think cyclical semiconductors and hardware stocks are in a sweet spot to ride on the recovery and Southeast Asian financials are good catch-up plays. Furthermore, secular trends continue to favor 5G beneficiaries, China’s digital economy and ESG leaders. Markets with robust tourism industries like Thailand, Japan and Singapore could enjoy a powerful tailwind from the gradual resumption of travel.
China, meanwhile, is surging ahead. Many parts of the economy have already recovered fully from the pandemic, and we expect the economy to continue expanding heartily in 2021. Further out, Beijing’s proposals in the 14th Five-Year Plan suggest strong support for, among others, its homegrown tech industries and its budding sustainable investment market in the years ahead.
Key investment themes
Asia’s new cycle takes shape
- Asia’s recovery, led by China, is gaining speed. We expect around 7%–7.5% GDP growth for Asia ex-Japan in 2021. Corporate revenues should benefit, while lower real rates mean a greater hunt for yield.
- China’s GDP should expand beyond 7% in 2021. Beijing’s four pillars—tech self-sufficiency, urbanization 2.0, a green economy and “dual circulation”—should support robust investment and consumption growth.
Where to invest:
- For ASEAN and India, a vaccine and travel-free corridors should present catch-up stories in consumption, tourism and supply-side relocation investment.
The next leg up in Asian equities
• Asia ex-Japan earnings growth of 20% expected in 2021, after an estimated 1% decline in 2020.
• Mid-teens upside seen for Asia ex-Japan equities in 2021, with top lines and margins recovering, free cash flow improving and growth broadening.
Where to invest:
• Prefer Asia’s cyclical tech supply chain and select laggards in ASEAN. We also continue to like industries with structural growth like 5G, fintech, education and healthcare.
Where to find yield in Asia
- Given ultra-low interest rates, demand for yield will continue in 2021. But selectivity is key to avoid excessive risks.
Where to invest:
- For Asia credit, we prefer high yield over investment grade in 2021. In HY, we continue to like China property; in IG, we like BBB rated bonds and perpetuals. We would avoid single B names with refinancing risk and long-duration single A names
- For equities, we like industrials, energy and regional banks and would avoid stocks with poor dividend track records. We forecast a 5% dividend yield for quality stocks, which should enjoy both carry and capital appreciation.
Suga’s new agenda sets to revive Japan
- We anticipate a strong recovery for Japan’s economy in 2021, with GDP expanding 3.2% (vs. –5.2% in 2020) and earnings growth surging over 40% (vs. –7%). This rebound should convince international investors to return to Japan’s equity market.
- Japanese equities overall are well positioned to benefit from the cyclical recovery in 2021.
Where to invest:
- We prefer the tourism industry ahead of travel resumption and the Tokyo Olympic Games in June 2021, as well as companies driving Japan’s digitalization movement.
- On the back of the carbon-neutral pledges by many of the world’s major economies, Japanese companies involved in the sustainability movement should benefit from the windfall of spending in smart mobility, renewable energy and energy-saving technologies.
Asia’s decade of transformation and investment ideas
Looking longer term, several trends stand out that we think will define the decade ahead for Asia.
The bottom-line for the year(s) ahead
As 2020 has shown, a historic recession doesn’t warrant exiting the market completely—on the contrary, it shows the importance of being diversified and staying invested. Our fingers are crossed that the Year of the Ox lives up to its bullish characteristics, but we’re not leaving anything to chance. So in addition to identifying opportunities in the year ahead, we advise investors to focus on the trends we think will play out over the years ahead.