Fund managers remain cautious on India, despite the recent turnaround in stock prices there, but they are increasingly optimistic that Chinese equities have bottomed out after three years of bear markets.

“We have seen so much negative sentiment on China that it doesn’t take much positive news to get [an uplift in the markets anymore],” says Andrew Milligan, head of global strategy at Standard Life Investments.

Others support this view. Andrew Pease, Russell Investments' chief investment strategist for Asia-Pacific, cites the latest HSBC flash manufacturing purchasing managers index (PMI) for China as a sign of hope.

In October, the PMI was 49.1, rising slightly from 47.9 the previous month. A number below 50 indicates that China’s industrial sector is still shrinking, but the rate of contraction is at least subsiding.

Asia ex-Japan stocks are around 10% undervalued, Russell estimates, with China, India and South Korea three of the most undervalued markets. India’s Sensex 30 index was last week trading around 17x price-to-earnings, while the figure is 11x for Shanghai’s A-share index, according to Bloomberg.

Other investors have also recently argued that it is time to jump into Asian assets – including Blackstone CEO Stephen Schwarzman in another AsianInvestor story today. Some, however, feel the time has not yet come, but will soon – such as Ernesto Prado, CEO and CIO of fund of hedge funds Ayaltis. 

Milligan and Pease share cautious, yet positive views on India, in line with the industry's position.

In this month’s HSBC global fund manager survey, 17% of the 13 global buy-side firms surveyed said they intend to overweight Indian stocks for the last quarter of 2012, with none planning to be underweight. This is a sharp reversal of the trend seen in a similar HSBC survey three months earlier, when 38% of managers said they were underweight Indian stocks.

The uplift follows reforms announced by New Delhi to further open its economy to foreign investors, including its retail and airline industry. Between early September, when the policy was announced, and late October, the Sensex has risen by 7%.

Russell's Pease highlights risks that India still faces, most noticeably around its currency; the rupee weakened by 17% against the dollar between September 2011 and last month. Price pressure is also a worry for the subcontinent, with inflation ticking up to 7.55% in August, higher than the previously forecast 6.95%. 

India will be a challenging market, despite improvement in sentiment in the past few months, notes Pease. “We need to see a turnaround in the growth story there and pump up growth without pumping up inflation too much.”

Ultimately, Standard Life Investments is neutral on Asia and sees equally tempting opportunities elsewhere. Milligan emphasises the firm's focus on individual companies, particularly those exposed to faster-growing markets like Canada, Latin America and certain European markets, such as Sweden.

“We don’t really see what’s happening in Asia as very different from the rest of the world,” says Milligan. “It’s not [just] a pro-Asian story. It’s a pro-Eastern European story, it’s a pro-Latin American story, and it’s even a pro-Middle Eastern story. That’s what people are buying: non-[US] assets.”