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Asia's Fall a Distant Memory

Led by China's Shanghai Composite, regional bourses blossom in springtime.

Asia's asset managers and analysts are abandoning previously gloomy outlooks as springtime is producing an unexpected blossoming of regional equity prices.

After Monday's gains, Japan's Nikkei has jumped nearly 2% so far in April while Hong Kong's Hang Seng has risen 4.8% and is now less than 1% away from its all-time high of 20,950, set on Jan. 24. China's Shanghai Composite Index has been the biggest gainer of all, surging 13% so far this month, and is now up 31.5% from its low on Feb. 27, when the market plummeted 9% in a day. On Monday, the Shanghai Composite Index closed up 2.2% at an all-time high of 3,596.44.

"We're still in a zone of loose monetary policy, so equity markets will remain reasonably buoyant" for the time being, says Sean Darby, head of Asia strategy for Nomura Bank in Hong Kong.

Since February, no amount of negative news has been able to hold back Asia's markets, including fears of further interest rate hikes in Japan and recent hikes in China. For example, China's domestic markets surged again Monday even as the People's Bank of China's 50 basis-point hike in reserve requirements took effect. The reserve requirement ratio is the level of funds the bank is required to hold against interest liabilities, and a hike in the ratio is generally seen as a negative factor for markets.

Hong Lian, an analyst at Goldman Sachs in New York, says even this tightening of the People's Bank's reserve requirement -- the sixth in the past 10 months -- is unlikely to have any significant effect on the growth in the economy either.

"In the short run, the reserve requirement hike will likely push up market interest rates and the yield curve modestly in China," Lian wrote in a research note last week. "However, we do not expect it to have much impact on the real economy or the financial markets." (The analysts' note says Goldman sees another round in rate hikes as "a more credible tightening measure.")

Although shares on the Chinese exchanges are mostly available for domestic investors only, shareholders in Asian ETFs have fared especially well recently as a result of the growth in regional markets. In the past two weeks, shares in the

FTSE/Xinhua China 25

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have surged 4.8%, the

iShares MSCI Taiwan

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has gained 3.8%, the

iShares MSCI Malaysia

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is up 6.5%, the

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iShares MSCI Singapore

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is up more than 4% and the

iShares MSCI South Korea

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has shot up more than 7.5%.

Still, Darby adds that "any change in risk appetite" can affect prices dramatically, as was the case in February. Darby was one of the first strategists in Asia to point out the potential rising risks of the yen carry trade back in October, and has been largely cautious on valuations of Chinese mainland companies.

Recently, he has recommended Taiwanese equity, which he says is still very undervalued. Darby specifically advises buying deep cyclicals such as


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Hyundai Steel


Daewoo Shipbuilding


Formosa Petrochemical


Honam Petrochemical




"It's traditionally counterintuitive to recommend these types of stocks at the top of a market cycle, but analysts way underestimated their earnings at the beginning of the year," he explains.

Other recent big gainers in Asia have been banks, as deal flow picks up again in the region and investors are becoming excited again over the prospects of consumer retail lending as growth refuses the cooldown.

Bank of America

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today announced that it is entering into a joint venture with China's second-largest bank,

China Construction Bank

, providing credit card services to Chinese customers. Bank of America will end up holding 37% of the joint venture, which will be spun off as a separate company, the bank said. In 2005, BoA paid $2.5 billion for a 9% stake in China Construction.

And China CITIC Bank, one of China's only major players in the industry that is still private, began selling shares today to investors on the Chinese mainland and in Hong Kong; a dual listing is planned for later this month. The bank is raising HK$24.72 billion ($3.16 billion) in Hong Kong, and 11.51 billion yuan ($1.49 billion) in China, it said in a preliminary prospectus today. Investors include

China Life Insurance

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, which is putting in HK$200 million -- about $25.6 million -- the prospectus said.

Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at

. He lives in New York.