Asia's China-fueled equity rally may run out of steam

The 26 percent jump has been driven by cyclical plays such technology and consumer discretionary shares, mainly on hopes that the worst of the global economic recession was over and that China's growth was cranking up again.

But the road to recovery will be long. The global economy could take longer than expected to recover, banking systems may suffer fresh setbacks and credit markets are still strained.

Companies needing to refinance debt also continue to face steep costs in credit markets, even as their cash flow shrinks as consumer demand sputters.

"There are a number of ways it can come a cropper. The risks are innumerable," said Tim Rocks, Asia equity strategist at Macquarie Securities in Hong Kong.

Analysts recommend look for companies with relatively robust balance sheets which may outperform their peers once doubts about a global recovery are finally wiped away, likely late this year or in 2010.

Other investors said they prefer to invest in high-grade bonds in the United States or elsewhere rather than Asian equities, thanks to the steep returns available due to a blow-out in credit spreads.

CHINA EFFECT

Markets more closely hitched to China's economic engine have benefited the most in the recent rally, as investors hope Beijing's nearly $600 billion of fiscal stimulus will filter through to regional economies, partly offsetting a collapse in exports to recession-hit Western markets.

Chinese stocks have climbed 32 percent this year.