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 seen continuing 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, versus an estimated 8% gain for the S&P 500 Index, Bloomberg surveys show.

asian stocks

A strengthening economic rebound in China and 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, chief executive officer at the Global CIO Office in Singapore. “Growth fundamentals and the ability to rebound quickly as Covid issues clear make the region particularly attractive.”

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The S&P 500 sank the most since late October on Monday 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 grounds should reap benefits, thanks to a slew of favourable government policies.

Take renewable energy for instance. China, Japan and 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.”

asian stocks

Solar- and wind-energy-linked stocks 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’ Energy Transition fund is among those betting on stocks in the electric-vehicle supply chain, which includes Korean battery makers such as LG Chem Ltd. and firms involved with hydrogen fuel cell technology. Japan’s auto stocks are in focus as the country prepares to phase out new gasoline cars by mid-2030s.

It Is Really Value’s Turn

Value shares have lagged and recovered time and time again in the last decade, but this time, investors are expecting a more robust pick up in stocks that look cheap on measures like 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 normalizes are picking up banks, industrials and consumer discretionary stocks -- heavyweights in the MSCI Asia Pacific index. Funds from BlackRock Inc. to UBS Asset Management are touting equities in Southeast Asia and India as part of their recovery trade playbook.

asian stocks

It’s not just sectors that could benefit from rotation into value; cheap markets to stand to gain.

Analysts estimate that Singapore’s Straits Times Index, Asia’s worst-performing major national gauge last year, 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 US$6 billion ($7.91 billion) bet on the nation’s trading houses and expectations for policy changes under Prime Minister Yoshihide Suga.

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.

asian stocks

M&G Investments is among asset managers investing in game-content developers in Japan, Korea and China. Nintendo Co., the maker of hit game Animal Crossing, rallied 50% last year while Sony Corp., 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 Ltd., and also ordered affiliate Ant Group Co. 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 Ltd. 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 Plc and Standard Chartered Plc 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.

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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 will likely 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.