Shares here could rally 20% in 2016: CLSA

How much will the Fed hike rates in 2016?

Asia equities may be getting a cold shoulder after a year of huge outflows, but the region could be poised for a massive rally next year, CLSA said.

That's because the price-to-book value – a gauge that measures share prices relative to the value of a company's assets – is trading substantially below their historic averages, according to the brokerage.

"We're way below the average price-to-book valuation for Asia ex-Japan," Amar Gill, head of Asia research at CLSA, told CNBC Wednesday. "There's only been three times in the last 20 years where we've closed the year at similar levels: That was 1998, 2002 and 2008. Each time, the market rallied between 43-68 percent."

However, in CLSA's 2016 outlook report, Gill said that with the current drop in valuation much more drawn out than in the 1998, 2002 and 2008 incidents, the recovery might be only around 20 percent in 2016.

Asian markets have certainly had a tough year: In addition to currencies such as Malaysia's ringgit and Indonesia's rupiah becoming some of the world's worst performing, the MSCI All Country Asia ex-Japan stock index is down around 11 percent so far this year.

Don't jump on the dollar bandwagon, just yet

The segment has been hard hit by massive fund outflows over the past few months, faced with a double whammy of the U.S. Federal Reserve's move this month to raise interest rates for the first time in nine years as well as slowing economic growth in China.

Among individual markets, China mutual funds and exchange-traded funds (ETFs) saw outflows of around $29 billion in the year to December 11, according to data from Jefferies. Over the same period, Korea fund saw more than $6 billion flow out, Malaysia funds around $837 million and Indonesia funds more than $1.2 billion, the data show.

"Basically, sentiment is very negative. A lot of it is discounted in the prices," CLSA's Gill said. "If some things turn out to be less negative than expectations, if China doesn't implode, if India's growth picks up, if the dollar doesn't rally as strongly next year as it has this year, I think there is quite significant upside in valuations in Asia."

Valuations have fallen quite a bit in the region. Asia ex-Japan is trading at a price-to-book valuation of 1.3 times, compared with the long-term average of 1.9 times, a 33 percent discount, according to data from Nomura. The region is trading at 11.6 times 12-month forward earnings, compared with a long-term average of 12.0 times, the data show.

Are emerging markets so bad they’re good?

The big swing factor could be the greenback, Gill told CNBC.

The consensus trade is for the dollar to continue its upward climb in the year ahead after sharp gains this year. The is poised to end 2015 with a more than 9 percent increase as expectations for the Federal Reserve to begin a tightening cycle boosted buying in the months leading up to the central bank's historic December meeting.

Now that the Fed has lifted rates and central banks in Europe, China, Australia and Japan remain more likely to provide more stimulus, the divergence in global monetary policy is expected to further underpin the dollar.

That's likely to hit at investor appetite for emerging markets.

"When the dollar is rallying then you have that headwind against emerging markets," CLSA's Gill said. "Our view is that the dollar continues its upside, but probably less strong in 2016 than in 2015 and that could help emerging markets. "

Gill isn't alone in expecting the U.S. dollar may not continue to easily lap other currencies.

Several market players, including Citi and National Australia Bank, are anticipating only around 5 percent gains for the dollar next year.

-Nyshka Chandran contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1