Is China the best of a bad job?

Leslie Shaffer | Writer for
Tomohiro Ohsumi | Bloomberg | Getty Images

With analysts and investors taking an increasingly bearish view on emerging markets, China might offer the best of a bad job, according to Jefferies, the global investment banking group.

"We expect China to once again confound the critics producing a strong relative outperformance versus emerging markets," Jefferies said in a note. The group added that it backed the consensus view that expected equities in developed markets will outperform emerging markets this year.

(Read more: Some fund managers turn positive on emerging markets)

Emerging market growth 'disappointing': HSBC

Jefferies has taken a "modestly bearish" call on China, but it expects improving global trade, subdued inflation pressures and ongoing financial reforms will ensure the mainland's equity markets come out ahead of emerging market peers.

"Expectations of tightening in U.S. monetary policy, a firmer U.S. dollar and falling coal prices have generally been a positive for China's equity markets," it said.

(Read more: China shares may be cheap, but they could get cheaper)

Jefferies expects the U.S. dollar will strengthen as the market begins to expect interest rate increases in 2015. This, in turn, will weaken Asian exchange rates even as China's currency is likely to strengthen.

Expectations of monetary tightening in the U.S. have weighed on emerging markets over the past year. From May to September, expectations that the Federal Reserve would begin tapering its asset purchases spurred sharp declines in Asia's markets. China's market was generally insulated because its currency is not free floating.

But Jefferies noted that China's economy still faces headwinds. "Many of the reforms that China must undertake are ideological and therefore may take a lot longer to produce underlying economic improvements to standards of living and incomes," it said.

Macquarie : Plenty of China opportunities in 2014

To be sure, not everyone is lukewarm on China.

Deutsche Bank expects China's shares to rally 20 percent in 2014.

"Our market outlook is based on our expectation of stronger-than-expected earnings growth as well as index re-rating on cyclical growth recovery and the positive impact of reforms," Deutsche Bank said in a note. "We believe that reforms will likely improve market consensus on China's growth potential and help reduce concerns on macro risks and earnings-per-share (EPS) volatility."

(Read more: China's bad-loan skeletons to haunt markets)

It noted the MSCI China index trades at only 9.1 times consensus earnings forecasts for 2014. "This implies that the market is expecting some significant deceleration in economic growth and EPS growth in 2014, which we consider unlikely," it said, noting it expects economic growth to accelerate to 8.6 percent in 2014 and for EPS to increase by 13 percent.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter