HONG KONG -- Emerging Asia stocks have been some of the biggest winners of the COVID-19 era thanks to the region's success in containing the virus -- and they are set to climb even further in 2021 as economies rebound and excess liquidity drives corporate earnings higher, experts say.
The MSCI Asia Emerging Market index, a gauge of the region's most-tracked stocks, climbed 63% from its March low, outperforming most of the world's markets last year, including U.S. equities.
"Asia's ability to manage the virus helps [by providing] increased certainty from an earnings outlook perspective," said Winnie Chwang, portfolio manager at fund manager Matthews Asia. "The growth profiles of countries in Asia, such as China, continue to stand out as attractive opportunities."
Chwang was among the six analysts and fund managers who spoke with Nikkei Asia about the stock market trends that drove 2020 and what to expect in 2021. All six said investors are betting on emerging Asian stock markets -- with the exception of the Philippines -- to maintain their momentum this year.
The region's stock markets are entering 2021 on a high note. A flood of new listings and rekindled appetite for "cyclical" stocks that had been battered by the pandemic helped drive Asia stock prices skyward in 2020, as did a sharp rise in retail investors.
Mom and pop investors, particularly in South Korea, Taiwan and Thailand, have flooded into the market in search of hefty returns in an otherwise low-yield environment.
Feeding their appetite for shares, a total of 855 companies went public in Asia in 2020, raising a total of $112 billion, up 69% from the previous year, according to data from Refinitiv. Chinese companies accounted for 82% of the total.
2021 could be equally busy, as more than 360 companies are already lining up to make their market debut this year.
Last year's flood of new listings, however, did more than meet investor demand for Asian shares -- it also helped change the constitution of the region's equity indexes. Technology companies now make up 44% of the MSCI Asia ex Japan index, up from 11% at the start of the decade. This could add further momentum to the region's shares, as analysts argue the index should command a higher valuation than before.
The index is trading at 15 times one-year forward earnings compared with a 10-year average of 13 times.
Looking ahead, investors have the highest hopes for China and South Korea, followed by Indonesia, India and Thailand, according to analysts and investors. This is based on the assumption that economic growth will stabilize, strong balance sheets will allow companies to borrow and invest, and tax pressures will ease.
Goldman Sachs expects Asia's corporate earnings to grow 16% next year, while Citigroup and Nomura are predicting a more than 20% climb in the best-case scenario. Credit Suisse analysts forecast 19% growth for the region, outstripping the 15% increase they expect for the rest of the world.
Credit Suisse analysts also predict 2021 will kick off a "new earnings super-cycle" in the coming decade, with sustained double-digit earnings expansion reversing the disappointing single-digit growth of the last 10 years.
"The Asian equity market has never fallen in a year of rising returns on equity and accelerating earnings per share growth over the past 17 years," said Dan Fineman, co-head of Asia Pacific equity strategy at Credit Suisse.
His top pick is South Korea, where he sees a 43% rise in earnings on the back of the ongoing economic recovery and a surge in exports to levels last seen before the start of the U.S.-China trade war.
Nomura expects "a strong earnings recovery in 2021," said Jim McCafferty, joint head of Asia Pacific equity research at Nomura in Hong Kong. "The current Asian index composition is quite different today, with a number of companies that are geared to higher-end more sustainable growth areas, such as tech, e-commerce and gaming."
McCafferty also argued that "the more important aspect for [the] 2021 equities outlook is prospects of normalization in 2022."
While the broad trends indicate more gains in 2021, however, investors are also wary after a volatile year. Some of the biggest sell-offs came in March, as the full impact of the pandemic became known.
Key risks for the year ahead include a surge in coronavirus infections in the region, disappointing results from vaccines or delays in their procurement and administration. An unwinding of stimulus measures that have kept economies afloat could also damage investor confidence.
Recent increases in coronavirus cases in Asian economies from Japan to Hong Kong have already unnerved global investors, who were net sellers of Asian stocks for the first time in nearly 11 weeks in December, data from Goldman Sachs showed.
"The question for asset allocators is no longer one of 'risk-on or risk off' but are we 'COVID-on or COVID-off,'" said Thomas Poullaouec, head of multi-asset solutions for Asia Pacific at fund manager T Rowe Price. While the path to a vaccine will be "rocky," he said, investors should take the opportunity to tap cheaper small-cap stocks and emerging markets.
"Asian equities will benefit from a sharp upswing in earnings, coupled with loose monetary policies," he said. "The suppression of the virus has been more effective in the region, making the path to the COVID-off environment less dependent on the success of the vaccine roll out. The economic momentum has started and is likely to expand further thanks to [the region's] pent-up demand from domestic consumption."