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Chinese, Korean Stocks Should Outperform Even As Emerging Markets Pull Back

An expected strengthening of the U.S. dollar in the second quarter could mean a more "challenging environment" for emerging market stocks but Chinese and Korean markets should outperform, says a senior strategist.

A lone Chinese investor talks on the phone as he monitors his stock prices at a security firm in Hefei, east China's Anhui province.
AFP | Getty Images
A lone Chinese investor talks on the phone as he monitors his stock prices at a security firm in Hefei, east China's Anhui province.

The April to June quarter will see a slowdown in inflows into emerging markets because the greenback will strengthen vis-à-vis the euro, Clive McDonnell, Head of Equity Strategy at Standard Chartered Bank told CNBC Asia's 'Squawk Box' on Tuesday. In the first three months of the year, $21 billion of inflows went into equities in developing markets, helping the MSCI AC Asia Pacific Excluding Japan Index gain close to 12 percent.

"We will see nothing like that in the second quarter," McDonnell said. "We will be focused on North Asia, especially Korea because we see Korea as quite leveraged towards the United States. That stronger dollar, the greater optimism towards the economy means that Korea is a very straightforward way to leverage on that recovery (in the U.S.)."

McDonnell also favors Chinese stocks as he believes the government-engineered economic slowdown has hit a bottom in the first quarter and the government should be getting ready to ease credit once again to revive growth.

"I think we will see some incremental moves to help the property sector during the latter part of this quarter and the third quarter, and we are also looking for further cuts in reserve requirements," he said. "As we head towards the handover of leadership in November, the policy environment gets better and we think that given the valuation levels in China, that should help in terms of the market re-rating."

He recommends buying into the consumer discretionary space, specifically retailers like Daphne, Trinity and Hai'er.

However, Sean Darby, Chief Global Equity Strategies at Jefferies in Hong Kong, has a more bearish view on China stocks because he does not see any major policy moves until at least the end of the year.

"Equity markets in China remains policy dependent," Darby said on CNBC's 'The Call' on Tuesday. "I don't think that anything dramatic is going to happen in the money markets until the whole leadership transition process has finished. I think the central bank is trying to steer a very even course coming into that period."

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