"We downgraded China about a week ago, for the very simple reason ... it is expensive on an absolute basis, it's rallied very much to outperform the rest of the region," said Herald van der Linde, head of Asia Pacific equity strategy at HSBC.
He said the bank was "not really comfortable" with some share price moves in the market.
"Companies ... were moving very rapidly, there was talk about margin trading pushing the market higher," he told CNBC's "Capital Connection" on Thursday, referring to the process in which investors borrow money to trade stocks.
"Typically, that's hoping that the retail investor pushes that market higher, but on pure fundamentals, we thought that market was simply getting a little bit expensive."
The bank, Europe's largest, downgraded China stocks from "overweight" to "neutral," and lowered its outlook for India stocks from "neutral" to "underweight."
"The FTSE China Index has had a staggering run this year," analysts wrote in a report dated July 8. "It has outperformed every regional Asia FTSE index and has risen 8.0% year-to-date vs -1.2% for FTSE Asia ex Japan."
They noted that health-care and high-growth technology stocks have made gains on the back of work-from-home and other pandemic-related trends and that a rotation back to value "may weigh on further upside" in China.
HSBC said it downgraded India because "much of the recent rally has already played out." The FTSE India has underperformed the broader region despite gaining around 40% from its market bottom in March.
The bank also drew attention to the coronavirus situation in India which "remains fluid."
Earnings estimates for India have been "drastically slashed" to negative 0.1% from 27% at the beginning of the year, HSBC said.
"We believe the downgrade cycle is not over yet and believe ample earnings downgrade risks exist for Indian equities," analysts wrote.
In the same note, HSBC said it raised South Korean equities from "neutral" to "overweight." The market offers "a good combination of strong growth and attractive valuations."
The bank also pointed to "resilient" semiconductor demand and "a long-term growth story of rising demand for cloud and memory."
"With easing of COVID related restrictions and aggressive policy support globally, the market should benefit from a likely recovery in exports in the coming quarter," analysts said. "Additionally, as Asia recovers from COVID-19, we believe there might be a temporary outperformance of value over growth and Korea is a value market that should benefit."
HSBC remained "overweight" on Hong Kong, Singapore and the Philippines, and "underweight" on Taiwan. The bank's stance on Thailand, Indonesia and Malaysia is "neutral," after upgrading Malaysia from "underweight."