Asian markets end the week in the red — and there may be more pain ahead

Key Points
  • Asian shares fell on Friday amid a market rout. There may be more losses coming.
  • Chinese markets were already under pressure from pre-holiday profit-taking.
  • Look at investment opportunities in Southeast Asian, says Morgan Stanley's chief Asia and emerging equity strategist.
Japan's equity market is still a value play
Japan's equity market is still a value play

Asian shares were a sea of red of Friday, take cues from a slump in U.S. stocks, which tanked overnight.

Losses were led by the Chinese markets, with Hong Kong's down more than 3 percent and the down more than 4 percent at midday after losing the most since February 2016, according to Reuters records.

The sell-off followed a robust rally in China's stock market earlier this year, which is now unwinding ahead of the Lunar New Year holidays starting next week, as investors lock in profits, said Kevin Leung, global investment strategy director at Haitong international Securities.

The earlier gains were due to very persistent inflow into Asia emerging equities for "a long time", particularly "large and euphoric inflows" driving valuations up, said Jonathan Garner, Morgan Stanley's chief Asia and emerging equity strategist.

That looks to be unwinding now, said experts. And the selling may not let up as there is also technical pressure, said Daryl Liew, head of portfolio management at Reyl Singapore.

The "buy-on-dip strategy that worked so well last year" is probably one to avoid right now, Liew added to CNBC.

This is a 'significant' market change and not a 'buy the dips'
This is a 'significant' market change and not a 'buy the dips'

Morgan Stanley's Garner recommended looking outside some of the big economies of north Asia. The house likes Malaysia, Singapore and Thailand, which has a defensive sector mix that tends to outperform in a bear market, he added.

Japan also received an endorsement with a growing economy, wage growth and inflation after years of stagnant growth.

"The overall fundamentals look pretty good," said Peter Boardman, managing director at NWQ Management.

Investors also need to consider this week's losses in the context of strong gains in the broader markets in the last year.

"I don't think it's realistic for markets to continue going up in a straight line," said Jim McCafferty, head of Asia ex-Japan equity research at Nomura Securities.

"I'm not suggesting this is a pause for breathe, but it seems as if it's more than that. I think it would be unrealistic to expect markets to gain every single week over a continued period of time."