Investment firm Baring Asset Management is buying more Japanese equities as it prepares for another rally in the market after its recent sell-off.
It is betting that expectations for better earnings will buoy the nation's shares and help them outperform other Asian markets over the coming six months.
The Hong Kong market, on the other hand, was likely to face challenges and come under selling pressure because of mainland firms listed here and the pessimistic outlook for the Chinese economy, said Khiem Do, head of the Asian multi-asset team at Barings.
"I still strongly believe that we are going to see more upside surprises in growth in Japan, whether it is earnings or GDP, compared to China," said Khiem, who manages a US$78.1 million fund. "Japan is now embarking on growth."
There was still a good chance that Japan, under Prime Minister Shinzo Abe and central bank governor Haruhiko Kuroda, would again be "the land of the rising sun", he said.
Japan's Nikkei surged 5 per cent yesterday, the index's best daily performance since March 2011. Before yesterday, the Nikkei-225 Index had lost 11 per cent since May 23, after having climbed more than 70 per cent since the start of November.
The mainland economy may perform worse than expected because of the possible re-emergence of inflation in the second half of the year, he said, adding that the People's Bank of China could be forced to tighten policy.
Do expects the mainland economy to grow less than 7.5 per cent this year.
Do said he was overweight in high-yield stocks and was avoiding the shares of mainland banks. "We tend to worry about the problems in their loan books," he said.
"When we buy high-yield, we go for Australia, Singapore and Hong Kong-based firms," he said.
Do added that his fund was holding more cash than it did in the first quarter.