Asia’s economies are bubbling away at a steady boil, with fast-growing China the powerful catalyst for the entire region. Some analysts estimate, for example, that China’s latest five-year economic and social-development plan could inject as much as US$1.5 trillion into the burgeoning Chinese economy, with the benefits spilling over into neighbouring countries.

“Other Asian countries would not do as well without strong growth in China,” says Mark Grammer, vice president of investments at Toronto-based Mackenzie Financial Corp. and lead manager of Mackenzie Universal Global Growth Fund. Grammer sees potential for increased price/earnings multiples for Asian stocks as global investors become more willing to pay for the high growth potential of the region.

Investors are also likely to be reassured by increasing transparency and improved accounting disclosure and corporate governance in Asian stock markets. Share prices for Asian stocks will also benefit from robust earnings growth and rising dividends. Foreign investors from Europe and North America who own Asian assets may also get an extra boost on their returns as Asian currencies begin to appreciate relative to those of the developed world.

But there are risks, including vulnerability to rising interest rates should inflation begin rising. There could also be a slowdown in exports should economic growth falter in China or in the developed nations that consume a large share of the products that Asia exports.

“The expansionary monetary policies of the governments of the U.S. and other developed countries are resulting in huge liquidity inflows to the Asian region,” says Robert Bao, portfolio manager of Fidelity Investments Canada ULC-sponsored Fidelity AsiaStar Fund in Hong Kong. “And that could put upward pressure on inflation.”

Chuk Wong, manager of Dynamic Far East Value Fund, sponsored by Toronto-based Dynamic Mutual Funds Ltd., is also wary of both the potential for rapid run-ups in the value of financial assets such as stocks and bonds due to the surging flood of hot money into the region and the rapidity with which that money could leave if conditions change.

Countries such as Taiwan, Thailand, Indonesia and South Korea have tried to solve this problem through currency and capital controls to stem the flow of speculative capital. However, the policy-makers in these countries must do a fine balancing act, says Wong, as they do not want to hamper productive long-term foreign investment: “I don’t expect Asian economies to turn too protectionist, but they don’t want hot money causing bubbles in asset values.”

Many investment fund managers favour industrial stocks that stand to benefit from extensive infrastructure development in Asian countries. Even if exports slow across the region, well-financed governments in many Asian countries will remain in a position to stimulate growth with capital spending on much-needed infrastructure.

There is also a range of investment opportunities related to consumer goods as a result of the burgeoning Asian middle class and rising incomes. “Many investors are looking for stocks that are not levered to global growth but instead have a regional or local focus,” says Francis Chung, director of Asian equities for Halbis Capital Management (Hong Kong) Ltd.

Here’s a look at the Asian markets, with the exception of China (which is covered in a separate article on p. B16):

> Hong Kong. With its physical and cultural proximity to mainland China, Hong Kong is often viewed as simply another way to play the China boom. However, it’s important to keep in mind that it is a small geographical area, and some fund managers say real estate prices there are approaching bubble territory — particularly in luxury apartments; most fund managers are avoiding Hong Kong’s real estate stocks.

Mark Lin, vice president, international equities, with CIBC Global Asset Management Inc. and manager of CIBC Asia Pacific Fund, likes Hong Kong Exchanges & Clearing Ltd., which has a monopoly on the stock-trading business in Hong Kong and is benefiting from stock offerings by growing public companies.@page_break@> Indonesia. With a population of almost 230 million, Indonesia is the region’s third most populous country, after China and India. It is also rich in natural resources, including metals, coal, natural gas and lumber, as well as in soft commodities such as palm oil, coffee and rubber.

Lin likes PT Bank Rakyat Indonesia, a leader in micro-financing that is benefiting from the spread of wealth to the lower levels of society.

Wong favours Bank Negara Indonesia, which is seeing rapid loan growth.

> Singapore. This country is viewed as having one of the most efficient governments in the world and is the centre for much of the wealth flowing into the region. Tourism is becoming a big economic contributor, driven by the development of two huge casino resorts.

Markus Koebler, vice president of international equities with Natcan Investment Management Inc. in Montreal and co-manager of Altamira Asia Pacific Fund, sponsored by National Bank of Canada,favours Oversea-Chinese Banking Corp., which is profiting from the growing wealth and lending opportunities throughout the region.

He is also partial to Jardine Cycle & Carriage Ltd., a retailer of luxury cars, including the popular BMW. “As people accumulate wealth, they want to show it,” says Koebler. “And one of the best ways to show it is through the car you drive.”

Grammer likes market leader DBS Bank and newspaper company Singapore Press Holdings.

Preferring an alternative to banks, Lin favours the Singapore Stock Exchange, another beneficiary of the money inflows.

> South Korea. Because South Korea’s strong reliance on exports, its economy is heavily tied to global growth. The country also faces political risk from a potential escalation in its skirmishes with North Korea.

Wong likes Hyundai Mobis Co. Ltd., South Korea’s largest supplier of auto parts.

Lin favours Megastudy Co. Ltd., a leading online tutoring company. “The focus on education begins in Asia when students are young,” he says. “To get into a good middle school and university is everything, as going to the best schools means better job opportunities.”

> Taiwan. An export-driven economy that has traditionally been highly dependent on consumer-electronics manufacturing, Taiwan is diversifying as it develops a deeper relationship with China.

Wong has taken a shine to St. Shine Optical Co. Ltd., a leading manufacturer of contact lenses.

> Thailand. Persistent political unrest has kept valuations low in Thailand, and that’s why it’s one of Wong’s more heavily weighted countries. He likes Pruksa Real Estate PCL, a developer of low-cost housing — an activity that is attractive in emerging countries as incomes rise and a middle class emerges.

> India. India’s economy is less reliant on external trade than those in the rest of the region, with almost 90% of its gross domestic product geared toward the domestic market.

“During the next five years, India could be the fastest-growing economy in Asia,” says Ajay Argal, manager of Excel India Fund, sponsored by Excel Funds Management Inc. of Mississauga, Ont., in New Delhi.

Argal likes the pharmaceutical sector, which is benefiting from the growth in generic drugs, both domestically and abroad. Favourites include Cipla Ltd., Dr. Reddy Laboratories Ltd. and Ranbaxy Laboratories Ltd. In the infrastructure space, he finds better values in the mid-caps, such as road-construction firm Nagarjuna Construction Co. Ltd. He also favours oil distributor Crompton Greaves Ltd.

“We are avoiding real estate companies, as house prices could fall back and some developers have balance sheet problems,” Argal says. “The central bank is looking at restricting lending to developers to cool speculation.”

In the financial area, Argal is partial to Shriram Transport Finance Co. Ltd., a non-bank lender and the largest player in small-truck and passenger-vehicle financing. Shriram issues loans to buy second-hand vehicles and specializes in lending to small-truck owners. In addition, the company owns truck service centres. IE