The upgrade was due to more stable macro economic data and improving sentiment after China underperformed other emerging markets this year, Sean Taylor, Asia Pacific CIO told FSA in an email reply.
Within Asia, the firm is overweight China, Philippines and Thailand equities.
“Current short-term macro data improvements and a stable currency makes China look relatively attractive,” compared to the volatility and uncertainties in other parts of the world, he said.
“Slower Chinese growth prospects coupled with pro-active reform programs to ensure a manageable economic growth transition is becoming more accepted.”
He noted that “state-owned eneterprise overcapacity issues are showing initial signs of improvement,” thanks to the reforms rolled out by the government.
The combination of policy fine tuning, MSCI inclusion issues under consideration and the expected Shenzhen-Hong Kong Stock Connect launch, market sentiment has improved in the second half, he said.
He also sees potential earnings upside in property and material sectors, based on the improving data.
The firm prefers Hong Kong-listed H-shares over their A-share counterparts because H-shares have more attractive valuations.
“We see sentiment improving toward H-shares as southbound flows continue to allocate toward the Hong Kong-listed Chinese banks. Flows from the mainland into Hong Kong have been improving and so has international interest in the market.”
Taylor believes possible risks, such as a faster-than-expected RMB depreciation, or a pronounced slowdown in the Chinese property market, are not too worrisome.
“As we head into the 2017 Politburo [congress], we are therefore expecting stability amongst asset classes and the currency,” he said.
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