MSCI Asia ex-Japan has gained 18.6 per cent as of Dec 3, outperforming other regions. Several banks see capital inflows to Asia accelerating in the months ahead and giving the MSCI Asia ex-Japan a further boost.
UBS expects some some monetary tightening in Asian economies in the second half of 2013, which its says will bode well for positive returns on Asian risky assets. The US fiscal cliff and the Eurozone crisis should have a manageable impact on Asia, said UBS.
"In an environment where growth is scarce, Asia's superior prospects should drive its outperformance in 2013. Even with their sharp rebound already, Asian equity valuations are still attractive."
UBS favours "equities with discounted valuations should outperform fairly valued credits". Its top picks are Chinese value stocks, Japanese exporters, and globalizing Asian giants.
It said: "(China's) economy has stabilized and looks poised for a cyclical recovery. The smooth political transition has removed a market overhang and valuations are supportive, with MSCI China trading at significant discounts to its 10-year historical levels and to peers.
"While the Korean market may be negatively impacted by technical factors in the short term, any temporary weakness in MSCI Korea is a good opportunity. The economy has been enjoying strong momentum that we think will be sustained in the near future. Our preference for Korea is driven by its strong earnings and low relative valuations."
Another bank has its bet on Chinese equities too.
Coutts, in a December report, said: "Economic data from China reinforced our positive view of Chinese equities. We were also pleased to see a further recovery in the A share market which suggests that domestic investors are back buying equities.
"Retail sales were up 14.9 per cent in October, industrial production up 10.1 per cent and investment spending up 20.7 per cent. News that China may remove a cap on the investment in domestic asset markets by qualified investors from sovereign wealth funds plus evidence of retail buying all helped the local equity markets.
"Lower interest rates could act as a catalyst for the outperformance of emerging markets over developed markets."
Meanwhile, it continues to take a constructive view of Japanese equities on a hedged basis, expecting to see a further 10 per cent weakening of the yen sufficient to bring about a further significant rally in the equity market.
"The only caveat to our positive view of the equity market is that speculative negative positions against the yen are already very high. Position squaring into the end of the year could bring a short term rally in the yen and some profit taking on equities," it said.
Investment bank Nomura sees the 10-year US Treasury yield rising to 2.5 per cent by end-2013, which will have "direct and substantial" implications for Asian equities.
Rising treasury yields display a very direct correlation with stronger foreign buying of Asian stocks, it said, and Nomura's conservative assumption is that Asian equity portfolio inflows in 2013 could lift the regional price-to-earnings ratio by at least 1.5 multiple points.
"US quantitative easing (now open-ended) should also return to the fore as a spur to cross-border capital flows. We note that the Fed’s first two QE iterations both helped fuel foreign buying of Asia ex-Japan equities of roughly US$40 billion over the subsequent six months."
Its top stock picks are from Asia’s more cyclical, externally focused, and deeply-discounted markets and sectors. Among the markets, it favours China, South Korea, Taiwan and Thailand, and is underweight on India, Malaysia, Indonesia and The Philippines.
It is neutral on Singapore, saying that the market's strong performance, the best in Asia in 2012, may set a difficult standard for 2013 - perhaps only single-digit returns as ongoing economic restructuring may drag corporate earnings.