It is getting harder to find good stock buys in Asia at a time when many of the region’s bourses have been hitting multi-year highs.

The fear of a sudden correction has become even more palpable since Asian stocks reached 16-year highs last week. On Monday, profit-taking knocked 0.5 per cent off the MSCI-Asia index and most of the region’s bourses continued to fall on Tuesday.

Will optimism, or indeed opportunism, keep the bull run going? There are strong reasons for believing that prices, which have been rising for the past three years, have little room for further growth.

Concerns about high valuations are growing in Hong Kong, prompting Morgan Stanley to warn clients on Tuesday that a correction might be imminent. The Hang Seng index has risen 11.4 per cent this year, boosted by a strong demand for quality Chinese stocks and higher-than-expected growth in the local economy.

Winson Fong, chief investment officer at SG Asset Management in Singapore, also warns that Hong Kong is fast approaching a peak cycle valuation.

The territory’s saving grace is its link with mainland China and the market is unlikely to suffer too big a hit given that a number of multi-billion dollar initial public offerings by Chinese companies are being launched this year, he adds.

Mike O’Sullivan, equity strategist at State Street Global Markets in London, agrees: “It is a developed world means of buying China.”

Mainland Chinese stocks have finally emerged from years in the doldrums, helped by long-awaited state-owned shares reform, easing of foreign investment rules and the planned resumption of domestic initial public offerings. The Shanghai composite index has risen 20.6 per cent this year. The main factor to watch for both A-shares and H-shares listed in Hong Kong, Mr Fong says, is how strictly Beijing imposes so-called austerity measures to cool over investment and the booming Chinese economy.

A slowdown in Chinese growth would have a global impact, not least in Australia, where commodity stocks have been driving up the market.

“After the sharp rise in the price of copper, zinc and other base metals, big buyers from China have restrained procurement in the first quarter,” Mr Fong says.

Tim Rocks, Asian equity strategist at Macquarie in Hong Kong, expects resource stocks in Australia to continue doing well this year but second-half performance is likely to be “not quite as good” as in recent months.

Among the more developed markets in Asia, the outlook remains bright in Tokyo. The recovery of the world’s second largest economy has seen foreigners becoming the main buyers of Japanese shares in recent months, sending the Topix average to a 14-year closing higher last week. Forecasts of strong corporate earnings in 2006, analysts say, will likely see domestic buyers catching up this year as long as the country continues its revival.

In Singapore, the export-based economy has been boosted by cyclical upswings in demand, sending the Straits Times index up 10 per cent this year. The market is dominated by the financial services sector, Mr Rocks says, so share prices may already have priced in much of the economic improvement. He still expects Singapore shares to end the year higher.

The most spectacular gains in the region in the past year have been made by markets where foreign participation remains relatively low overall, despite a recent upturn in buying. India, Indonesia, Pakistan, Vietnam and Sri Lanka have risen by more than 20 per cent this year.

Mr Fong still finds Indonesia appealing, despite a 25.5 per cent rise this year, because of his positive view on its economic and earnings growth.

The consensus on the slow movers in Asia – Taiwan, Korea, Thailand and Malaysia – is that they will continue to be flat.

The worst of Thailand’s recent political upheaval seems to be over but the future remains unclear. South Korea, despite higher than expected growth in the first quarter, will likely be hurt by a strong currency.

Taiwan might be the one bright spot in this group since valuations are cheap and few observers expect the economy to be hurt by continuing cross-strait tensions with China.

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