In his latest investment strategy report, Daniel Casali, a strategist at Merrill Lynch in Hong Kong, outlines what he believes are seven signs that show Asia is stabilising.

First, China's purchasing managers' index (PMI) rose for the third consecutive month. Chinese output and new orders are now expanding after seven months of contraction, driven by domestic demand. China's manufacturing PMI moved up to 49.0 in February and is close to pre-Lehman levels. The output component rose to 51.2, signalling growth (above boom-bust 50 level) for the first time since September. New orders are also in expansion mode at 50.4

Second, Korea's inventory-shipments ratio has improved for two consecutive months, and this ratio has an excellent relationship with Asia equity prices. A pick-up in this ratio could signal better days ahead for share prices.

Third, Korean export growth has improved. Korean export growth moved from disastrous to less disastrous. In first 20 days of February, exports to China were up 3% year-on-year and exports to the US were down only 3%.

Fourth, unprecedented production cuts mean Japan is no longer building up unwanted inventory. Inventories declined 2% in January month-on-month, the first decline in five months. Japanese factories expect to expand production in March for the first time since August. Toyota, for example, is planning to increase production in May.

Fifth, PMIs in Hong Kong and Singapore are also improving. Hong Kong's PMI edged higher to 40.6 in February, up from a low of 38.8 in November. Singapore's manufacturing PMI has picked up a tad. New orders have improved for the third month running, which is a good sign from a highly globalised economy.

Sixth, early cyclicals are outperforming within Asian equity markets. Sector-wise, technology shares are outperforming financials while consumer discretionaries are outperforming industrials.

Seventh, there is evidence of a shift towards economy-sensitive companies. The only Japanese equity sector recording gains year-to-date is autos; in Korea, gainers are technology companies and autos.

Casali notes, however, that investors are broadly unconvinced and require further evidence of stability via data on Asian trade, Chinese domestic demand and G7 consumption.