Asian stock markets have witnessed a return of risk appetite mainly from domestic investors, resulting in the MSCI Asia Pacific ex-Japan Index rising by 14.4% in May, the third consecutive double-digit rise. However, Jan de Bruijn, London-based Asia equity fund manager at Threadneedle Asset Management, is taking a more conservative approach and is cautious about the outlook for the region.

"After such a strong rally it is to be expected that Asian markets will tread water and take a breather for a while," says de Bruijn. "Markets have gone from being cheap at the start of the year to being close to fair value, but we have an element of comfort knowing that they are not too expensive yet."

While risk appetite remains higher than at the start of the year, market risks have also increased, with visibility for the second half continuing to be poor, de Bruijn notes.

Loose monetary policy and aggressive fiscal policy have ensured Asian economic growth will now be stronger than initially expected at the start of the year, but it is a global recovery in economic demand which is needed to sustain the quality of this growth, he adds.

Without a global recovery, Threadneedle believes that growth in Asia is questionable, although China and India are exceptions.

Threadneedle remains confident, however, that the sheer liquidity in the region, coupled with the loose monetary policy, limits the downside.

"We are unlikely to retest the lows seen in the last year as Asia's comparatively superior macro outlook suggests that Asian markets are likely to continue to outperform other equity markets," says de Bruijn.

The lack of certainty means that Threadneedle continues to hold a mixture of quality names or leaders within their sectors in Asia, preferring the domestic plays in contrast to export-related stocks. The fund house says catalysts that would make it more aggressive include clearer signs of an improving global macro environment and indications of better earnings growth for the second half.

Threadneedle was founded in 1994. It actively manages around $82 billion in assets worldwide. The fund house is the international investment platform and subsidiary for Ameriprise Financial, a US financial planning and services company.