Asia share markets are headed for a slightly better year after 2014's low returns, but bigger gains will come from seeking reform beneficiaries in China and India, Goldman Sachs said.
"2014 has been another year with an unexciting headline return," with the MSCI Asia Pacific ex-Japan index (MXAPJ) up only around 3 percent after a selloff in September wiped out earlier gains, Goldman said in a report Monday. But after the recent "concentrated" outflows, overall positioning in the region appears light, it said.
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In addition, many Asia ex-Japan active funds are up only around an average 2.4 percent so far this year, underperforming the MXAPJ, it said.
"Performance pressure so far and a desire to amplify returns could drive broader re-risking from active funds," Goldman said.
But even so, Goldman only expects the MXAPJ will rise to 520 by the end of 2015, compared with around 477 currently, for a single-digit return, amid conservative earnings growth forecasts and expectations valuations are already full.
Reform players
Goldman sees "pockets of opportunity" to boost returns in the region, such as reform plays.
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"We expect the reform momentum to gather pace next year and if implemented effectively, improve investor confidence in growth and corporate profitability," it said, with India, China and Indonesia among the beneficiaries.
"The key areas of focus for reform next year are likely to be state-owned enterprises, fiscal reforms, anti-pollution (in China), public sector undertakings [government-owned corporations], power and banking reforms (in India), and infrastructure spending (in Indonesia)."
China
Goldman rates China shares at Overweight, expecting a "solid" 14 percent by the end of 2015 and a 12,300 target on the HSCEI index, with the central bank's decision Friday to cut interest rates likely to help sentiment near-term. The HSCEI is currently trading around 10,757.
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But it cautions that the market may get a slow start in the first quarter, with Beijing's anti-corruption campaign likely to pick up during the Lunar New Year holiday period. It prefers reform beneficiaries, "new" sectors and select A-shares.
India
In India, it expects the reforms started by the new administration will gather pace, adding the economy may benefit the most in the region from lower oil prices flowing through to its current account, fiscal deficit and inflation.
Overall, Goldman rates India at overweight, with a 9500 target for the Nifty index, which is currently trading around 8477. It also expects the country's internet sector could show "outsized" gains over the next few years amid rising internet and smartphone penetration, while logistics and packaging plays could also benefit from e-commerce.
Indonesia
In addition, Goldman upgraded Indonesia to overweight from market weight, noting the market has traded in line with the region over the past three quarters.
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"There has recently been progress on macro adjustments in Indonesia amid an improving political backdrop," Goldman said. It expects catalysts from leadership changes in the opposition Golkar party and further fiscal reforms after the key move to raise fuel prices.
Active funds are also largely neutral in their positioning in the archipelago's market after 2013's "taper tantrum" led to sharp outflows.
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Goldman set a Jakarta Composite Index target of 5800, compared with the current level at 5152, for around 15 percent upside.
"Consistently high profitability in a subdued growth environment helps support valuations. Indonesia is the only market in the region with still over 20 percent return on equity," it said. "Markets and sectors with high profitability and consistent earnings growth may price better in an environment of subdued economic growth, even if some of them may have relatively higher valuations."
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1