For the unenlightened among us, some reports claim that the monster rally in the smaller Southeast Asian markets this year is due to a growing trend towards sector research. The theory goes that under the old system of country research, foreign fund managers would simply bin their reports on the much-derided markets of Thailand, Indonesia and the Philippines. With the advent of sector research, fund managers might have found their eyes straying from the write-ups of regional titans to adjacent figures on some of the equivalent companies in these markets. 'And guess what? They didn't look so bad,' one report said. In fact, sector research in Asia has been around for some time. There has not been a sudden rush of sector reports at the start of this year to neatly explain the explosive nature of these rallies. Nor does this theory explain an almost comical situation that one fund manager saw in Bangkok just a couple of weeks ago. There was such a crush of his peers making a lemming-like rush to the Thai capital that brokers arranging company visits did not have enough cars to accommodate them all. This was hardly the result of fund managers finding something interesting in a lost corner of a sector report. If one really wants to explain the rallies in terms of foreign fund managers and buy-side research, it has to come down to old-fashioned country calls. Thailand, Indonesia and the Philippines have come in for years of bad-mouthing since the 1997 Asian financial crisis for their political instability and sluggish efforts at economic reform. There was even a psychological aspect to the treatment as reports on the three countries were lumped together under the derisive category of 'the TIPS', making it difficult for any self-respecting fund manager to be seen taking them seriously. No doubt much of the criticism was justified. But in a region stacked full of potential problems, the TIPS became convenient whipping boys for the strategists. With the three markets making up less than 5 per cent of MSCI Asia Ex-Japan indices, benchmark-driven foreign fund managers in the past two years needed no second invitation to follow the advice of strategists and zero weight the TIPS. Unfortunately for the condescending strategists and their fund-manager clients, there was something stirring in the jungle which has since come out and bitten them. This beast is called a bull and because of the negative mind-set of the foreign investment community, the bull was already charging before they got into the action. Local investors are taking profits and passing some of their shares to foreigners. After net stock sales of 8.79 billion baht (about HK$1.56 billion) last year in Thailand, foreign investors have already made 14.1 billion baht in net buys so far this year. Ironically, it was the mass exodus by foreign investors that helped squeeze out the last seller, creating the tinderbox conditions in which only a small spark would ignite a huge rally from depressed levels. Take the case of Thailand. Part of the rally has come about because many companies have cast off the financial baggage of the Asian crisis and are reporting solid or even thumping earnings, yet their valuations are dirt cheap. Even after the recent run it is still possible to buy companies on less than two times earnings or half of book value. Beyond that, however, is a growing realisation that we could be seeing the start of a multi-year credit up-cycle. This is not a big surprise given that the Thai slump was well under way in 1996, giving more than five years to deleverage and clean up. Where the markets could be heading would take us neatly full circle back to what Thailand and the rest of Asia was known for before the crisis hit - the domestic demand story of a rapidly growing middle class. Certainly in Thailand, it is the once-reviled banks, developers and finance companies that are making the biggest moves. Some numbers are on the side of investors bidding up these stocks. Last year, sales of detached homes soared 30 per cent and a recent survey showed 51 per cent of Bangkok residents wanted to buy homes in the next six months because of low interest rates and affordable prices. Consumer confidence was up 12 per cent last month while car sales jumped 45.2 per cent. This is not being lost on Thai investors. For example, Siam Panich Leasing, which specialises in car loans, has seen its stock jump 38.26 per cent to 34.50 baht since the start of the year. But it has just reported that earnings per share rose 10.4 per cent to 3.39 baht, putting it on just 10 times trailing earnings. Then comes this year's growth and the likelihood of the first dividend since the Asian crisis. In short, the real reason for the rally was cheap stocks, low interest rates and the locals sensing a pick-up in the economy. These markets might be TIPS but the British have an appropriate saying: 'Where there is muck there is brass.'