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Citi says Asian markets badly hit in the trade war are now looking promising

Key Points
  • Stocks in China, Hong Kong, Taiwan and South Korea have been among the biggest losers since tensions between the world's top two economies escalated last month.
  • But Citi Private Bank said it has maintained an "overweight" stance on those markets.
  • The bank's Chief Investment Strategist and Chief Economist Steven Wieting said global investors are under-invested in emerging Asia.
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Citi: We have a 'modest overweight' in emerging Asia

Citi Private Bank said on Tuesday it has maintained an "overweight" stance on several Asian stock markets that have been badly hit in the ongoing trade fight between the U.S. and China.

Stocks in China, Hong Kong, Taiwan and South Korea have been among the biggest losers since tensions between the world's top two economies escalated last month — a point acknowledged by Ken Peng, head of Asia investment strategy at Citi Private Bank. But he said there are reasons to remain optimistic about those markets for now.

"We're still most positive on Asia," he told reporters at the bank's mid-year outlook in Singapore.

He added that friction between the U.S. and China in technology could end up benefiting companies in South Korea and Taiwan. Chinese tech firms are facing greater challenges doing business with U.S. companies, and that could potentially allow South Korean or Taiwanese players to fill the void and gain market share globally, he explained.

More generally, much of the global economic growth will center in Asia given the region's rising middle class that will drive consumption demand, said Peng. That's set to benefit sectors such as health care, autos and insurance, he said.

VIDEO5:0105:01
Wall Street is overly optimistic on Fed cuts and trade, top economist warns

And economic conditions in Asia have turned for the better given an increasingly dovish U.S. Federal Reserve. Investors increasingly expect the American central bank to cut interest rates this year, which allows policymakers in Asia some room to stabilize their own economies with easier monetary policies, Peng said.

That could strengthen the reason for investors to increase their investments in Asia, said Steven Wieting, chief investment strategist and chief economist at Citi Private Bank.

"Emerging Asia is the place where global investors are under-allocated," he told CNBC's "Squawk Box" on Tuesday.

Wieting noted he's not recommending investors to only invest in Asia. Instead, a diversified portfolio with a mix of fixed income and stocks across different regions can help investors to safeguard the value of their investments, he explained.

It's up to trade

That said, trade developments remain a risk that could hurt returns from stock investments, said Wieting.

U.S. President Donald Trump and Chinese President Xi Jinping are expected to meet at the G-20 summit in Japan later this week, with many investors hoping that the two leaders would hold back from escalating the tariff fight.

Wieting warned against counting on the Fed to rescue the day if tensions between the two countries take a turn for the worse.

"They could potentially react, they could try and offset but they are not the underlying cause. And their ability to offset some sort of trade shock, I think, is going to be low," he said.

"I think it's probably overestimated in markets how much the Fed can do about short-term disruptions, if there are any."