Macquarie is recommending the heaviest overweight in Singapore within an Asian equities portfolio and banks within sectors. In terms of actual allocations, however, it suggests that around 27% of an Asian equities portfolio, its highest recommended weighting, be devoted to China.

With the global manufacturing cycle likely to weaken in the months ahead, focusing on countries and sectors that are low beta to the cycle is likely to pay dividends, Macquarie says.

When it comes to sectors, consumer staples, telcos and utilities are all very consistently low beta to the cycle, while materials, consumer discretionary and tech are consistently high beta. Macquarie is overweight all three of these low beta sectors.

In addition to being low beta to the global cycle, consumer staples and telcos have excellent valuation support, with both sectors still cheap on those metrics which, in the past, have been the most reliable signals of value for each of these sectors, Macquarie says.

Utilities, on the other hand, are not cheap (currently trading a full standard deviation above their long-run average on forward PER), but with the sector such a consistent outperformer when the global manufacturing cycle is deteriorating, and also very low beta recently, it commands an overweight position given the firm's overall view on markets.

Macquarie notes that three factors are key in assessing Asian equities: valuations, the direction of the global manufacturing cycle, and risk appetite.

At around two times price-to-book value, 14.8 times forward earnings and 20.1 times trailing earnings, the odds of losing money on a three-month investment horizon are now 60%, while the odds of a greater than 10% return are a mere 16%, if history is a guide, Macquarie says.

When key indicators of the cycle are rising, returns on Asian equities are strong, and when they are falling, returns are negative. For equity investors in Asia, getting the direction of the cycle right is crucial. The two most reliable and timely indicators here are earnings revisions (for Asia ex Japan) and the US ISM (new orders minus inventories). Both are close to 20-year highs, suggesting the next major move in these indicators is much more likely to be down than up, the firm says.

Risk spreads fell further in recent weeks as investors continued to chase high risk assets. Asian equities have been a key beneficiary of this trend. Macquarie says forecasting changes in risk spreads is not its area of expertise, but if sentiment towards global economic growth now takes a breather as re-stocking demand fades, risk spreads are unlikely to continue falling sharply, removing what is currently an important tailwind for Asian equities.

With valuations stretched, and indicators of the global manufacturing cycle at near 20-year highs, the balance of risks to Asian equities is to the downside over the next three months, in Macquarie's view. A pullback of 15-20% is its base case scenario.

Macquarie recommends that investors have a defensive and domestic growth bias to their portfolios, with defensive sectors such as consumer staples and telcos as key overweights. In terms of countries, Singapore and Taiwan remain relatively good value, the firm says.