By Daniel Leussink

A cocktail of negative factors has driven MSCI's broadest index of Asia-Pacific shares outside Japan down 15.5 percent so far this year. Currencies from emerging markets whose economies are vulnerable on the current account have come under pressure.

Stephen Chang, a Hong Kong-based portfolio manager at global bond house PIMCO, reckons the region's high-yielding dollar bonds have become cheap, after higher U.S. interest rates pushed prices lower.

"They are weak for a reason, but valuations have adjusted to reflect the new risk that has emerged. We do think there are some gems that we can find from a bottom-up perspective," Chang said.

For a lot of fund managers, the sell-off has been excessive. Many of them are seeking alternatives to U.S. equities, which have been the lone outperformers globally, after U.S. mid-term elections resulted in a divided Congress and lowered the odds of further fiscal stimulus.

"The price action that we have seen has been so dramatic that it is pricing in a continued deterioration of fundamentals, almost pricing in a recession," said Graziano Creperio, a London-based investment specialist at M&G Investments.

Creperio points to healthy current accounts in some emerging markets, and their lower foreign debt levels compared with a decade ago during the global financial crisis as reasons to be optimistic. The M&G (Lux) Dynamic Allocation Strategy has increased exposure to shares of Chinese, South Korean and Taiwanese companies.

CHINESE REAL ESTATE BONDS

The Indian rupee is Asia's weakest performer this year, while a few months ago the Indonesian rupiah was at its weakest since the Asian financial crisis in 1997-98.

In seven Asian equity markets - India, Indonesia, the Philippines, South Korea, Taiwan, Thailand and Vietnam - foreign investors sold a net $33.76 billion of Asian equities between January and October this year.

Foreign investors sold a net $14.55 of equities in these markets in October alone, when U.S. 10-year Treasury yields hit their highest since early 2011.

Slowing growth and the U.S.-Sino trade war have dragged China's stocks down 20 percent this year, and foreign holdings of Chinese equities has dropped.

Creperio cites China's policy measures such as personal income tax cuts, fiscal support and monetary easing as catalysts for a recovery.

Ernest Yeung, a portfolio manager at T. Rowe Price in Hong Kong, says companies associated with China's "old economy" are among his favorite investments, including shares of financial and consumer firms.

"We are very comfortable about positioning into the next one to two years, because we believe that pocket is under-valued by mainstream investors," he said.

Yeung said the price-to-earnings ratio of equities on the China A-shares market is at 9.8, its lowest level since late 2014.

Tanuj Dutt, a senior portfolio manager at Nikko Asset Management in Singapore, said that onshore Chinese shares are "flashing green" to him in terms of valuations.

Foreign investors have also been gradually adding to their holdings of Chinese bonds, via the limited channels for offshore investment in the mainland.

PIMCO's Chang finds value in dollar-denominated bonds in Chinese real estate, adding that the top-five players in the space are deleveraging and have been able to gain market share.

China's largest developers by sales revenue are Country Garden and Evergrande, according to property researcher CREIS.

PIMCO estimates China attracted $86 billion in foreign bond inflows and $30 billion in equity investments over the past 12 months.

T. Rowe's Yeung, who manages a global emerging market equity-focused value strategy, is thinking about adding to his strategy's equity holdings in Indonesia as the market has corrected a lot, focusing on mid-cap firms in financials, property and building materials.

He sees India as the region's most expensive market - with some consumer goods companies trading at a price-earnings ratio of 30 - though he's charmed by the country's non-state banks, which have been neglected since they underwent a bad credit cycle.

One such lender is ICICI Bank, whose share price has risen 18.3 percent on the year-to-date.

"We think they're coming to the tail end of cleaning up those bad debts," Yeung said. He adds that shares of financial firms in the MSCI Emerging Market index are currently trading near the lower end of their historical range since 2004.

(Reporting by Daniel Leussink in TOKYO and Andrew Galbraith in SHANGHAI; Editing by Vidya Ranganathan and Simon Cameron-Moore)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)