HSBC Global Asset Management expects emerging market stocks to play catch-up with those in developed economies, with China's relatively cheaper shares well positioned to lead the rebound.
Bill Maldonado, chief investment officer in Asia-Pacific for the $419-billion money manager, said China's reform agenda has reinforced his confidence about investing in the second-largest economy. He also favours cheap South Korean shares.
Emerging market shares have underperformed this year as signs of economic recovery in the United States have shifted investor focus to developed markets.
"Valuations and profitability are very good in emerging markets and right now developed markets are looking pretty fully valued," Mr Maldonado, 50, told the Reuters Global Investment Outlook Summit in Hong Kong on Monday.
He said that while China's consumer sector shares were expensive - and got more pricey after a rally on Monday following the reform announcement on Friday - industrial sector stocks offered the best opportunities because of their relatively low valuation.
He said China would lead a rotation into emerging market stocks because "it's one of the cheapest emerging markets in the world, and it's one of the most profitable".
The S&P 500 is up 26 per cent so far this year.
The stock benchmark indices in emerging markets such as Brazil, China and India have declined this year in US dollar terms. They all trade at a discount to the more than 16 times forward 12-month earnings for the S&P 500.
There "will be a degree of catch-up", as investors were turning more confident about the global economy.
"We were all very concerned about China 12 months ago, much less so now, especially after the third plenum last week," said Mr Maldonado, who left an academic career in laser physics for the financial industry nearly 20 years ago.
He said investors may have got too optimistic about the level of detail they would receive following the four-day conclave of senior leaders of the Communist Party, but "the big and strong determination to reform" is clear in China.
While it doesn't change the picture immediately, he said the push was a "fantastic opportunity for investors".
The HSBC GIF Asia ex-Japan Equity fund invested just over a third of its assets in the shares of China- and Hong Kong-listed companies as at September-end. All of the fund's top 10 holdings were North Asian companies, a fund factsheet showed.
The fund's portfolio was led by Korea's Samsung Electronics Co Ltd, Taiwan Semiconductor Manufacturing Co Ltd and China Mobile Ltd, the factsheet showed.
Mr Maldonado, who gained a PhD at Oxford University, said his firm was also heavily invested in South Korean shares with his Asia fund investing a fourth of its assets into them.
He said Korean shares were unduly punished after the yen weakened against the dollar but many of them continue to enjoy a market-leading position.
Citing one example, he said the sum of market value of every Japanese electronics company is less than the value of Samsung Electronics alone.
"People's concerns about the ability of a weaker yen to boost the Japanese and hurt the Korean economy were massively overblown. It just hasn't happened," he said.
Copyright @ Thomson Reuters 2013