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China - A Big Underperformer This Year: Strategist

China's stocks may have staged a strong comeback in recent months, but analysts see further upside ahead.

"China has been a big underperformer this year," said Geoffrey Dennis, global emerging markets strategist at Citi Investment Research and Analysis told CNBC on Tuesday.

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While the Shanghai Composite Index gained 18 percent in the last three months alone, it's still down 7 percent for the year, underperforming other regional stock indices.

"Just a few months ago, the worry was of course [that] the Chinese economy was going to slow very sharply. We went back to all the fears of a potential hard landing," Dennis said.

But China's recent move to hike interest rateswas a sign that the economy is on track.

"The Chinese authorities are saying that they're confident the economy is bottoming out. That's why they feel comfortable raising rates a little bit to suck some of the liquidity out of the system," noted Dennis.

Citi recently upgraded Chinese stocks, along with India equities, to "overweight".

The bank is also overweight in South Korea and Taiwan. Both markets are "very attractively valued" and among "the cheapest...in the merging markets space," said Dennis. "They are both markets that are pretty closely tied to China, in terms of growth, in terms of exports."

Hot Money Flows

Overall, Dennis is very positive about growth prospects of emerging markets, especially with zero interest rates in the U.S. contributing to the money flow into the emerging market space.

"If interest rates in the U.S is zero, any positive interest rates anywhere in the world presents...a positive carry. And you've got a lot of carry trade opportunities in the emerging markets. Obviously the dollar is relatively weaker at the moment, and that is always positive for emerging markets," he added.

But he cautioned that the spectacular growth lodged in the last quarter will likely moderate in the current quarter.
"Part of our scenario is that the U.S. dollar- which has gone straight down since early June - is going to stabilize."

Although markets are expecting the Fed to announce quantitative easing measuresat its meeting next week, Dennis highlights this has all already "been priced in."

"People know it's coming; we now have some idea of how big it's going to be. The Fed's really got to have a large "bazooka" as they say to actually surprise the markets positively. So I think you probably do get a bit of a sell of financial assets on the QE announcement, [and] potential rally in the dollar."