China, Japan stocks steal the show in first quarter

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Asian equities are off to a winning start this year, with China emerging as the region's best performing market in the first quarter, followed by Japan in close second.

The MSCI Asia Pacific Index rose almost 7 percent in the first three months of the year, trumping the MSCI World Index's 3 percent gain over the same period.

"The outperformance is based on positive global factors plus some idiosyncratic domestic factors," Tai Hui, chief Asia market strategist at J.P. Morgan Funds told CNBC.

Abundant global liquidity, provided by the Bank of Japan and European Central Bank, combined with monetary accommodation via interest rate cuts by several central banks in the region and lower oil prices have bolstered sentiment towards Asian equities, he said.

China, Japan steal the show

China's Shanghai Composite has rallied 17 percent so far this year, supported by the central bank's monetary easing cycle and a re-engagement in the equities asset class by the local retail investors.

"It is noteworthy that since the end of Chinese New Year, both new account openings and market trading volume have moved significantly higher," Morgan Stanley wrote in a recent report.

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Expectations of further monetary stimulus will continue to buoy the market going forward, say strategists.

"The authorities in China are on the case to support economic activity, and that's going to involve equity market friendly measures," said Tim Condon, head of research, Asia, ING Financial Markets. ING forecasts a cumulative 75 basis points of interest rate cuts and 150 basis points of reserve requirement ratio cuts by year-end.

Hot on the heels of China, Japan's Nikkei 225 was the second top performer in the region, up 13 percent year to date.

Japanese stocks are benefiting from the central bank's quantitative easing policies and the shift by the country's pension funds out of bonds and into equities. Expectations on a steady improvement in the domestic economy and greater shareholder returns are also supporting the market.

Other top gainers

Philippine and Australian stocks also performed well, up 9 percent and 10 percent, respectively, putting them in third and fourth place.

Australia's stock market has defied the country's downbeat economic conditions. The rally has been driven by high-yield dividend stocks as investors chase returns in a low interest rate environment. Broader market sentiment has been supported by the Reserve Bank of Australia's interest rate cut and expectations of further easing.

Gains in Philippines stocks, on the other hand, are a reflection of the country's economic successes.

In January, the International Monetary Fund raised its growth projections for the Philippine economy for 2015 and 2016 to 6.6 percent and 6.4 percent - from 6.3 percent and 6.2 percent - reflecting the boost from lower oil prices and anticipated pick up in government spending.

"The Philippines is continuing to do really well, it seems like the market is re-rating for stronger growth," said Condon.

South Korea rounded off the top five performing markets in the region. The KOSPI is up more than 6 percent this year.

Market darling no more?

India, the Asian market darling of 2014, has emerged as a laggard this year.

After scaling fresh highs earlier this month, the rally in the benchmark Sensex stalled in recent weeks amid concerns over corporate earnings and a lack of fresh catalysts. The index is up almost 2 percent this year.

"The run-up in the market started before the elections, so it's looking a bit expensive now from a PE (price-to-earnings) perspective. As a result, we could see some consolidation. But, the positive undertone will remain," said Hans Goetti, head of investment, Asia at Banque Internationale a Luxembourg.