This week’s upheaval in global equities is prompting investors in Asian stocks to turn their attention to markets where their ownership has been falling in recent years, with China and Malaysia fitting the bill.

While the S&P 500 Index has declined 2.8% since last Friday’s poor US jobs data triggered the sell-off, Malaysia’s and China’s benchmarks have both lost less than half of that. Societe Generale SA, Invesco Hong Kong Ltd and UBS Group AG are among those touting China’s attractiveness while Goldman Sachs Group Inc this week upgraded Malaysian shares, citing the market’s defensive nature when it comes to external shocks.

India too is seen winning favor for its fast-growing economy and a domestically driven market. The benchmark NSE Nifty 50 Index is down 1.7% since last Friday.

The resilience of major emerging-Asian markets indicates investors’ “positioning is too light” at a time when their earnings outlook is expected to improve, said Pruksa Iamthongthong, deputy head of Asia equities at abrdn. Their propensity to benefit from potential Federal Reserve interest-rate cuts is better than developed-market peers, she added.

Stocks in Asia witnessed a historic selloff on Monday due to worries over a US recession and bubbly tech stocks, as well as a resurgent yen that caused massive unwinding of a popular global funding strategy. The rout, which was more pronounced than that seen in the US and Europe, has forced investors to reassess their exposure.

China features high on the list. Its cheap valuations have drawn new appetite from global investors who have fled the market in recent years as the world’s number two economy faltered and tensions with the US escalated. The country’s benchmark CSI 300 Index is down 2.6% this year, making it one of the world’s worst performers.

“Mainland Chinese equities dodged the worst of early August’s global selloff, a trend set to continue after their protracted underperformance versus global peers,” Bloomberg Intelligence analysts Francis Chan and Marvin Chen wrote in a note. The outperformance stemmed from “their drawn-out suffering and trough valuations,” they added.

Foreign investors held around 2.7 trillion yuan (US$377 billion or RM1.7 trillion) worth of Chinese onshore stocks as of the end of June, according to figures published by the People’s Bank of China, accounting for around 4% of the market’s total. They turned net sellers in June and July. 

The CSI 300 Index is trading at about a 35% discount to the MSCI World Index on earnings-based valuations, according to data compiled by Bloomberg.

For Frank Benzimra, a strategist at Societe Generale, the latest global meltdown has increased “the probability of a rotation” to China from Japan, due to the former’s low valuations and weaker correlations with other markets. 

Meantime, while Indian shares remain expensive after a record eight-year bull run, foreign investors are slowly returning as expectations grow that Prime Minister Narendra Modi’s third term in office will help the nation continue delivering world-beating economic growth. 

Another bedrock of the market’s stronger immunity to external shocks is the overwhelming dominance of local funds. Overseas investors’ holdings of NSE-listed stocks fell to 17.4% by the end of June, marking the lowest since December 2012, according to local data provider primeinfobase.com. 

Its recent strength makes it clear that “the Indian stock market is much more resilient in the face of a US downturn and related Wall Street sell-off than the likes of Japan,” Christopher Wood, global head of equity strategy at Jefferies Financial Group Inc, wrote in a note. “India’s stock market has been driven by domestic money, whereas the opposite remains the case in Japan.”

An analysis by Anand Rathi Wealth Ltd, a local brokerage, shows cross-border yen borrowing doesn’t affect India as the nation’s involvement in the so-called carry trade is less than 3% of the world’s total. The popular funding strategy - which involves borrowing at low rates to fund purchases in higher-yielding assets elsewhere - has suffered over the past week after the Bank of Japan’s surprise rate hike caused the yen to surge. 

To be sure, it remains a question mark if global investors will flock back to China and India in any significant way in the coming months. India’s frothy share valuations continue to be a hurdle, while China faces risks from slowing growth to heightening trade tensions under a potential Donald Trump presidency. 

These uncertainties make Southeast Asia stand out.

According to an analysis by Goldman Sachs, the region and defensive sectors carry the lowest downside risks to a correction in the US and Japanese stock markets. They have instead tended to outperform in such episodes in the past.

The Wall Street bank likes India and Indonesia the most in Asia. The Jakarta Stock Exchange Composite Index has shed 1.3% since Friday’s US sell-off.

Investor mood has improved toward Malaysia now that Prime Minister Anwar Ibrahim has entered his second year in office, bringing political stability, with a robust economy and a stronger currency also boosting confidence in local assets.

Foreigners were net sellers of Malaysian shares in eight out of the past 10 years as the 1MDB scandal and a revolving door of leaders raised concerns about political instability. They have sold nearly US$68 million worth of shares this month.

“We view this as a rare buying opportunity” in Malaysian stocks amid policy continuity, improved earnings delivery and local currency appreciation, CGS-CIMB strategist Chehan Perera wrote in a note.

  - Bloomberg