By Yang Huiwen

THE local bourse upstaged almost all other key Asian markets in last month's stock market rally - with only Shanghai performing better.

July's dazzling rally marks the fifth straight month of gains for most major global markets.

Against a backdrop of rising risk appetite and increasing optimism on both corporate earnings and an economic recovery, investors piled into equities, lifting Asian stock markets to 10-month peaks.

The Shanghai Composite Index outpaced the other major Asian markets with a 15.3 per cent gain, the seventh consecutive monthly gain for the bourse.

Beijing's fiscal and monetary changes, with more than US$1 trillion (S$1.45 trillion) in new loans written by Chinese banks in the first half of the year, had driven gains of over 80 per cent in mainland China stocks since the start of the year.

The rally has been led by the energy, banking and property counters.

Observers say this hot money has spillover effects on neighbouring markets Taiwan, Hong Kong and Singapore.

The Straits Times Index (STI) was not far behind Shanghai, with a double-digit gain of 13.98 per cent for last month.

It is the fifth winning month for the local bourse and follows a record 21 per cent surge in May, as well as gains of 13 per cent in April and 6.6 per cent in March. In June, the STI rose 0.17 per cent.

According to data agency EPFR Global, equity funds attracted collective inflows of US$9.52 billion in the final week of last month - the highest weekly tally since mid-June last year.

Investors had 'responded to a slew of better-than-expected earnings and macroeconomic data' that week, it said.

'Asian stock markets will likely benefit from a strengthening of their currencies, rising oil prices and falling interest rates, and the current macro-environment seems to be benign in this respect,' said Citigroup Asia-Pacific strategist Paul Chanin.

Hong Kong's Hang Seng Index was up 11.94 per cent last month while Taiwan's Taiex Index gained 10.04 per cent.

A 7.3 per cent gain in Australian shares, though much more modest than their peers in the region, is the biggest monthly rise Down Under in nine years. Over the last five months, it has gained 29 per cent - its strongest five-month run in just over 20 years.

At home, the combined market value of Singapore-listed companies shot up 13.3 per cent from $545 billion at the end of June to $617.7 billion.

SingTel retained its crown as its market value surged 16.7 per cent to $55.7 billion. The telco was followed by palm oil giant Wilmar International at $38.25 billion and DBS Group Holdings at $31.7 billion.

Economic data released over the past week has 'remained consistent with an economic recovery coming through', said AMP Capital Investors chief economist and head of investment strategy Shane Oliver.

However, the hefty run-up could mean the risk of STI consolidating is now higher, said DBS Vickers in a report last week.

It anticipates consolidation to start around current STI levels, and that the pullback may see the index going down to the 2,230 or 2,170 level.

'If people see (stock) prices going up, you're ever more inclined to chase, particularly if there are no sellers around,' said JPMorgan head of Singapore equity research Christopher Gee.

He also said the current market rally is fuelled a lot more by ample liquidity rather than fundamentals.

'The liquidity environment can carry things a lot further than what is supported by the fundamentals. It's hard to say what's actually been priced in.'

While another round of consensus earnings upgrades could come after the second-quarter results season, 'things are still not that certain', he said.

'We're just pulling off some of our more conservative or worst-case scenario assumptions.

'We're still not exactly sure where sustainable earnings will be as we exit this recession.'

This article was first published in The Straits Times.