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HONG KONG (Reuters) - Chinese shares are at a turning point as the country shows "definite evidence" of a recovery in corporate earnings, a top strategist at HSBC Global Asset Management said, adding that Southeast Asia stocks looked expensive.
Bill Maldonado, who oversees about $80 billion as the chief investment officer in Asia-Pacific for the money manager, picked Greater China among the top-three opportunities in the world for 2013 and said he particularly favored Chinese financial, consumer cyclical, materials and energy sector stocks.
Southeast Asian markets such as the Philippines and Indonesia, investor favorites since the financial crisis, are starting to look over-priced, Maldonado, who is underweight the region, told the Reuters Global Investment 2013 Outlook Summit on Thursday.
The Hong Kong-based executive, who left an academic career in laser physics for the financial industry nearly 20 years ago, said investors have realized that China will avoid a hard landing and they could get a 20 percent return in China from current valuation levels.
"But they're not jumping in yet," said Maldonado. "They're saying: 'That sounds really good but we're just going to keep watching for a bit longer.'"
"I'd say that's very typical of markets at turning points," Maldonado said.
The Shanghai Composite Index .SSEC fell below the 2,000-point level this week for the first time since January 2009 and has dropped about 10 percent so far in 2012.
HSBC was early with its bet on a China rebound and has suffered as a result, with the HSBC Asia ex Japan Equity fund returning 10.3 percent through September this year, underperforming a 16 percent jump in its benchmark index.
Maldonado's belief about a rebound, however, remains intact, with China Mobile (0941.HK), China Construction Bank (601939.SS), CNOOC (0883.HK) and Industrial and Commercial Bank of China (1398.HK) finding a place in the fund's top-10 picks.
The fund executive, who etched out diagrams on a white board in the Reuters office to show valuation patterns in China, said macro concerns in the world were abating and fundamentals were coming back to the fore.
Maldonado, who holds a PHd and is a former Oxford University student, said HSBC Global Asset has exhausted its QFII quota, which allows foreign funds to invest in mainland markets.
Investors pumped money into Southeast Asian countries this year as the confidence in the region with a combined economy of $2 trillion lured them with steady economic growth and a rapidly growing middle-class.
Maldonado, however, is less bullish on the region.
Barring United Overseas Bank (UOBH.SI), no other company from the region figured in HSBC Asia ex-Japan fund's top-10 holdings at the end of September.
The 49-year-old said while the region had good long-term promise, investors may be ignoring valuations that are starting to look stretched.
"Growth at any price is not a winning strategy and to some extent that's what's happening in ASEAN," he said.
Indonesia, at 3.1 times price-to-book value, is Asia's most expensive equity market on that basis, followed by Philippines and Thailand, according to Thomson Reuters Starmine. Asia trades at 1.4 times and China at 1.6 times.
The so-called defensive sectors such as consumer staples and healthcare, which investors piled on as a safe bet in a slowing global economy, are expensive, Maldonado said.
A recurring theme across regions that Maldonado said he is seeing is the heavy divergence between valuations of cyclicals - or sectors most geared to economic growth - and defensive sectors.
For example, the Chinese consumer staples sector tracked by MSCI is trading at its highest price-to-earnings multiple and the biggest premium to Chinese materials in the past decade, according to Thomson Reuters I/B/E/S.
"The valuation difference is huge and what I always say to people who are overweight defensives and underweight financials and cyclicals, is, please explain to me, please make up a scenario that would make that valuation logical," he said.
"My problem is that if a company is twice or thrice as expensive as the market, how is that defensive?"
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Editing by Michael Flaherty and Muralikumar Anantharaman