Goldman Sachs, in a recent report, said that it expects 18 percent total dollar returns for the Asia Pacific equity markets in 2021 as the global economy has started recovering from the pandemic and earnings have rebounded.

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The overarching macro theme for 2021 is a robust growth recovery, the brokerage firm stated. Economists from Goldman Sachs expect above-consensus GDP growth globally (6 percent) and in Asia ex-Japan (7.5 percent).

In terms of the current market setup, cyclicals have outperformed defensives by 15 percent over the past 6 months. GS thinks against a backdrop of improving growth, a modest increase in yields and light investor positioning, cyclicals have room to rally further.

Location-wise, GS favors north Asia and is overweight on China and Korea. It also raised India back to 'overweight'. It further favours cyclicals and raises weights in autos and transportation but lowered in healthcare.

North Asia markets performed best in 2020. China rose 28 percent, followed by Taiwan, over 18 percent rise and Korea, up 13 percent. In contrast, ASEAN markets underperformed significantly, with Indonesia, Singapore and Thailand falling 19-27 percent. Meanwhile, India was roughly flat, with 12 percent lower forward earnings offset by 15% P/E expansion.

"Earnings changes were moderately negative for China and positive for Taiwan and Korea, with significant valuation expansion for China. Negative earnings revisions accounted for the bulk of the index declines," noted the brokerage.

Further, low real and nominal rates should support valuations, even with some rise in bond yields, it noted. A weak dollar and strong commodity prices would constitute as a tailwind for regional markets, added the brokerage.

Going ahead, earnings resurgence is likely to be seen in 2021, with further gains in 2022. After an estimate of a 5 percent fall in 2020, regional earnings are apt to expand 23 percent in 2021 and a further 16 percent in 2022, stated the brokerage.

The recovery will be on the back of margin recovery, which amplifies revenue growth and earnings will be the primary driver of market returns as well, it added.

It also believes that the absolute level of regional EPS may regain the previous 2017 peak by end-2021 and make new highs in 2022, providing fundamental support to equity markets.

The key risks, as per GS, include growth (vaccine delays, pandemic resurgence), interest rates (inflation/bond yield spike that pressures valuations), and geopolitical tension (US/China tension).