This week, I’m updat­ing my views on some of the emerg­ing mar­ket coun­tries in Asia.

While I’m upgrad­ing Chi­nese equi­ties from neu­tral to over­weight, I’m down­grad­ing South Korean and Indian stocks from neu­tral to underweight.

Start­ing with China and South Korea – the two coun­tries are both highly exposed to global growth, but China cur­rently appears to be the bet­ter posi­tioned of the two and is likely to hold up much bet­ter from a growth perspective.

First, while Chi­nese equi­ties have per­formed well year to date, they are down over the past 12 months. As a result, Chi­nese equi­ties are cheap com­pared to other Asian emerg­ing mar­ket coun­tries, trad­ing at 1.6x book value.

Recent eco­nomic data also sug­gests that growth in China is sta­bi­liz­ing and sup­ports a soft landing. The most recent pur­chas­ing man­agers index, a key mea­sure of man­u­fac­tur­ing activ­ity, came out last week at a better-than-expected 50.5, and retail sales growth is actu­ally up to 18.1% year over year. Finally, Chi­nese infla­tion, which we all know was a big prob­lem in 2011, is falling. It’s down to 4.1% from 5.5% in Novem­ber and 6.5% in August.

To be sure, South Korean equi­ties are also cheap com­pared to other emerg­ing mar­kets. This, how­ever, is nor­mal. South Korea typ­i­cally com­mands a big dis­count due to ongo­ing uncer­tainty over North Korea. The cheap­ness of South Korean stocks is also jus­ti­fied given the country’s wors­en­ing eco­nomic out­look. South Korea’s eco­nomic read­ings have par­tic­u­larly suf­fered recently.

Finally, I’m down­grad­ing India in response to the country’s recent surge in val­u­a­tions and per­sis­tently high infla­tion. Indian stocks appear expen­sive once again. They are up more than 20% year to date and are cur­rently trad­ing at 2.6x book value. This com­pares with the Asian emerg­ing mar­ket aver­age of 2.4x book value.

In addi­tion, growth in India is still strongly below trend and while the country’s prof­itabil­ity is respectable, it has been on a down­ward trend over the last cou­ple of months. Finally, Indian infla­tion, while down from a cou­ple of months ago, is still in the dan­ger ter­ri­tory at 9.3%. All in all, Indian stocks are sim­ply too expen­sive given cur­rent fun­da­men­tals (poten­tial iShares solu­tions: MCHI, ECNS).

Source: Bloomberg

Inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume. Secu­ri­ties focus­ing on a sin­gle coun­try may be sub­ject to higher volatility.

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