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," Maldonado, 50, told the Reuters Global Investment Outlook Summit in Hong Kong on Monday.
Maldonado 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 Index is up 26 percent 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 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."
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