Goldman Sachs picks a raft of Asia stocks to buy right now

Published Thu, Nov 4 20217:31 PM EDT

Analysts at Goldman Sachs have picked a host of stocks to navigate what they expect to be a "bumpy equity path in the near term." After months of earnings upgrades stretching back to October 2020, the MSCI AC Asia Pacific ex-Japan Index earnings revision cycle has dipped since August, Goldman analysts, led by Alvin So, said in a research note on Oct. 20. This marked the end of the region's earnings upgrade cycle, So and his team added, with more earnings downgrades expected in the coming months. This comes as risks to economic growth and global supply chains have begun to materialize, with adverse impacts on consumption and production activities, the analysts noted. These risks have not been fully considered in current projections, So added. As a result, the investment bank is turning cautious on its regional earnings outlook. "We expect overall earnings growth will remain strong, but several indicators suggest an earnings revision downcycle is emerging," the analysts noted. Goldman has forecast earnings growth of 32% in 2021 for MSCI AC Asia Pacific ex-Japan Index and sharply lower growth of 9% in 2022-23. Against this backdrop, "equity returns will be principally driven by profit growth," So and his team said. Nevertheless, Asia remains an attractive region for investments amid its positive macro outlook. Earlier this month, t he International Monetary Fund said it expects Asia to be the fastest-growing region globally this year, with projected growth of 6.5%. The region's growth will be led by China and India, the fund added, with projected growth of 9.5% and 8%, respectively in 2021 . Within the region, Goldman is above consensus on India and Taiwan. The investment bank believes that India's cyclical recovery and digital transformation, coupled with its accommodative policies and high government spending, will continue to drive earnings in the country. Moreover, India's banks are on the cusp on a new upcycle, the analysts noted, driven by an improvement in loans growth momentum. In Taiwan, earnings growth will be supported by a strong semiconductor sector and global tech exports, alongside a stable macro outlook, Goldman added. Stock picks Goldman has compiled a list of buy-rated stocks within its preferred markets sectors that are expected to outperform on favorable macro or industry tailwinds and stock-specific catalysts. Picks include Taiwanese electronics manufacturer Yageo Corporation , Indian conglomerate Reliance Industries , energy companies Bharat Petroleum and Hindustan Petroleum , ICICI Bank and State Bank of India . The Wall Street firm also highlighted a basket of "upstream beneficiaries and margin winners" that it expects to outperform against the backdrop of rising inflation and input costs. Goldman screened for buy-rated stocks that exhibit high and positive correlations to rising cost inflation within materials and energy, semiconductors and health care. These "cost inflation beneficiaries" include Hong Kong-listed lithium manufacturer Ganfeng Lithium , pharmaceutical giant WuXi AppTec , aluminum producer China Hongqiao , Zijin Mining , Indian pharmaceutical manufacturer Aurobindo Pharma and New York-listed photovoltaic systems manufacturer Daqo New Energy — all of which have positive correlations of more than 50%, the analysts noted. Meanwhile, the investment bank's list of "high and stable margin winners" include tech giant Tencent , sports retailer Anta Sports , internet company Naver, Ambuja Cements and diagnostics services provider Dr Lal PathLabs . These firms have strong pricing power and are more likely to be able to pass through costs to consumers to protect margins, the analysts noted. Lastly, Goldman named a list of stocks with positive earnings revisions, noting that stocks with high and positive earnings revisions have historically outperformed in the long term. "Given our view that earnings will be the main return driver and with the earnings cycle likely to turn down further, we expect the market will continue to reward companies that can exhibit strong and positive earnings revisions," So and his team said in a separate note on Oct. 27. Within this basket of stocks, Australia-listed investment firm Washington H. Soul Pattinson , metals producers Pilbara Minerals and South32 , Hong Kong-listed chemicals company Dongyue Group , maritime transport firm Pacific Basin Shipping , dry bulk carrier owner Pan Ocean, Korean Air Lines and Hyundai Steel all have three-month earnings revisions of more than 40%. Investors looking for single-stock exposure to multiple baskets should consider Taiwanese semiconductor firms United Microelectronics , Vanguard International, Taiwan Semiconductor Manufacturing Company and MediaTek Goldman said. Indian digital consulting firm Infosys also offer exposure to multiple baskets. the analysts added.

From left, the flags of the Hong Kong Stock Exchange, China and Hong Kong are seen flapping in the wind on May 6, 2019.

Anthony Wallace | AFP | Getty Images

Analysts at Goldman Sachs have picked a host of stocks to navigate what they expect to be a "bumpy equity path in the near term."