This market will steal the show in fourth quarter
As fourth quarter kicks off, there's one market in Asia that has investors excited: Japan.
The world's third largest economy may be struggling to shake off the drag from the sales tax hike that took effect in April, but a weakening yen (Exchange:JPYUSD=), improving corporate profits and attractive valuations will likely power gains in equities in the coming months, say strategists.
"We are going to get a combination of value meeting growth - the Japanese market is cheap - so there's value, and on top of that we are going to get earnings growth," said Jesper Koll, head of Japanese equity research at JP Morgan Securities Japan.
Read More Japan economy still struggling with tax hike, data show
"[There will be] upward earnings revisions driven by stronger-than-expected top line growth and margin expansion. Corporate Japan has restructured and productivity is just about to explode," he said.
On a year-to-date basis, Japan's benchmark Nikkei 225 (Nihon Kenzai Shinbun: .N225) has lagged behind its peers, up just 0.7 percent.By comparison, India's Sensex (Hong Kong Stock Exchange: 2836-HK) and China's Shanghai Composite (Shanghai Stock Exchange: .SSEC) have risen 26 percent and 12 percent, respectively.
Koll's optimism was shared by several other strategists.
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"We're overweight Japan. Abenomics is making progress, albeit slowly, the yen continues to weaken, which is good for stocks, and pension fund reform is a huge potential catalyst," said Simon Grose-Hodge, head of investment advisory, South Asia at LGT Bank.
China, India cheer
Asia's economic giants India and China are also expected to come out swinging, extending their solid gains so far this year.
Two catalysts providing gains in China's markets are the upcoming launch of the Shanghai-Hong Kong Connect scheme - which will give global investors greater access to domestic Chinese equities - and the Fourth Plenary Session - a meeting of the Chinese Communist Party's elite 200-plus-member Central Committee that is expected to focus on consolidating anti-graft efforts and deepening reforms for economic sustainable growth.
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"We expect the Fourth Plenum will accelerate reforms, so we're positive on China. But you have to be a stockpicker," said Uwe Parpart, chief strategist at Reorient Group (Hong Kong Stock Exchange: 376-HK), who is positive on financial and technology stocks in the mainland.
For India, signs of an economic turnaround and fresh reform initiatives will help to fuel further gains in the market. Although market watchers caution that the easy money has been made.
"India's good a lot of good things going on, but you worry can it get any better than this?" said Grose-Hodge .
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Riding the US recovery
With the U.S. recovery gaining traction, investors say export-oriented markets including Taiwan and Korea also stand to gain in the final three months of the year.
"Data out of the U.S. has begun to show a pickup in capital spending - a positive for Taiwan and Korea," said Grose-Hodge .
Taiwan's Taiex and South Korea's Kospi (Korea Stock Exchange: .KS11) index are up 4.1 percent and 0.4 percent, respectively, so far this year.
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Pockets of weakness
Some Asian markets will struggle however, analysts say.
In Australia, weak domestic economic fundamentals, low earnings per share (EPS) growth and a domestic currency under pressure don't bode well for the stocks, warns Goldman Sachs (GS), which has an underweight rating on the country.
Meanwhile, Hong Kong stocks are set to face challenges amid a rising interest rate environment, softer China growth and higher valuations compared with their mainland counterparts, say strategists.
"Hong Kong is caught in the middle of all sorts of stuff. Firstly, we'll have to see how the current political turbulence pans out," said Parpart. "On top of this, higher interest rates will be negative for Hong Kong, because the market is heavy with real estate, so there will be some downward pressure," he added.
