Goldman expects an 18% return for Asia-Pacific stocks in 2021 — here are the bank's investment ideas

Published Tue, Nov 17 202012:21 AM EST

(This story is for CNBC PRO subscribers only.) SINGAPORE — Asia-Pacific will likely be in "a sweet spot" in 2021 as economies grow and interest rates stay low — and that will translate to better returns for equity investments, according to Goldman Sachs. The bank has projected 18% of total returns in U.S. dollar terms for the MSCI Asia Pacific excluding Japan index next year, Timothy Moe, Goldman's co-head of Asia macro-research and chief Asia-Pacific equity strategist, told CNBC's "Street Signs Asia" on Monday. Total returns include the capital gains from the index's climb, any foreign exchange gains and dividend payouts. Goldman's projection was based on better-than-expected growth prospects next year for global and regional economies, said Moe. In a report published last Wednesday, Moe and other Goldman analysts outlined some investment ideas for Asia-Pacific stocks in 2021. The bank continues to favor North Asian markets, with an "overweight" stance on China (both A- and H-shares) and South Korea. It also raised India to "overweight" as the South Asian country is the "most positively sensitive market to vaccine optimism." In terms of sectors, Goldman retained its "overweight" rating for internet and media, consumer retail and services, as well as tech hardware. It also added autos and transportation to the "overweight" category, and downgraded health care from "overweight" to "market weight." "Overall, we think that this improvement in growth — very much sparked by delivery of a vaccine or several vaccines — will be the dominant issue," Moe told CNBC. "As economies recover, their growth and corporate earnings come through. And if you couple that with the fact that investors' positioning is still quite light in Asia, we think that's a pretty potent cocktail of positive factors that will drive markets higher," he added. Here are Goldman's investment ideas for Asia-Pacific stocks in 2021. 'Digital dozen' and China The bank said it likes a group of 12 large cap digital economy stocks that it dubbed the "digital dozen" for their "strong future growth prospects and superior profitability drivers." These are the stocks, categorized by their home bases: China: Alibaba , Tencent , Meituan , Xiaomi, Baidu and TAL Education South Korea: Samsung Electronics, NAVER and NCSoft Taiwan: TSMC Singapore: Sea India: Reliance Industries "While these stocks trade at higher valuations relative to the region, we think the lower for longer rate environment will continue to support multiples for these long duration stocks. Furthermore, valuations look reasonable when accounting for strong growth outlook," said Goldman. A lower-for-longer rate environment refers to low interest rates for a longer period of time, which is good for stock valuations. Chinese tech stocks will also benefit from China's greater emphasis on its domestic market, as outlined in its "dual circulation" economic development strategy, it added. Recovery play Cyclical stocks — companies with share prices that typically follow the economic cycle — will continue to outperform defensive stocks, which provide stable dividends and earnings regardless of overall market conditions, said Goldman. The bank recommended taking targeted exposure to "sensitive" cyclical stocks that could benefit from the global economic recovery and the development of a coronavirus vaccine. That includes sectors such as commodities and tourism, which have been among the hardest hit in the pandemic, it said. Such companies with the best potential upside include China Southern Airlines , China Eastern Airlines , and Hong Kong's rail operator MTR Corporation . Goldman's recovery play also includes stocks that have underperformed the broader market, but are expected to "deliver strong earnings growth over the next two years." Their picks with the best growth potential in the next two years include Australia's Oil Search and Star Entertainment, China's Tongkun Group, and State Bank of India . Targeted 'alpha' ideas Goldman has three targeted ideas to help investors beat the market, or what's commonly known as "alpha" strategies. First, the bank said respective margins in the "upstream" and "downstream" sectors could diverge next year. Upstream generally refers to the beginning of a production process such as oil and gas exploration or designing of a semiconductor, while downstream points to when products get produced and distributed. To position for such margin divergence, the bank recommended owning shares in upstream commodity and semiconductor companies, while going short on downstream firms. Second, the rising importance of environmental production and potentially greater focus on climate change under a Biden presidency in the U.S. means renewable energy stocks could gain in the coming year, said Goldman. The bank's investment ideas in this area include buying stocks in the water treatment or wage management sectors, as well as companies involved in developing alternative energy sources. Finally, an expected strengthening of the Chinese yuan against the U.S. dollar would help Chinese stocks to outperform, said Goldman. Its basket of potential yuan "winners" include Beijing Capital International Airport and Shandong Gold Mining . CNBC PRO subscribers can access live PRO Talks, including our Dec. 2 discussion on opportunities and risks in international markets.

Traders work at the Goldman Sachs booth on the floor of the New York Stock Exchange.

Peter Foley | Bloomberg | Getty Images

(This story is for CNBC PRO subscribers only.)

SINGAPORE — Asia-Pacific will likely be in "a sweet spot" in 2021 as economies grow and interest rates stay low — and that will translate to better returns for equity investments, according to Goldman Sachs.

The bank has projected 18% of total returns in U.S. dollar terms for the MSCI Asia Pacific excluding Japan index next year, Timothy Moe, Goldman's co-head of Asia macro-research and chief Asia-Pacific equity strategist, told CNBC's "Street Signs Asia" on Monday.

Total returns include the capital gains from the index's climb, any foreign exchange gains and dividend payouts. Goldman's projection was based on better-than-expected growth prospects next year for global and regional economies, said Moe.

In a report published last Wednesday, Moe and other Goldman analysts outlined some investment ideas for Asia-Pacific stocks in 2021. The bank continues to favor North Asian markets, with an "overweight" stance on China (both A- and H-shares) and South Korea.