As growing numbers of Asians acquire wealth and an appetite for products and conveniences long enjoyed in the developed world, they are creating a smorgasbord of investment opportunities.

China and India alone account for more than one-third of the world’s inhabitants, and the rapid pace of their economic growth is having spillover effects on neighbouring countries through interregional trade and increased tourism.

“Consumption growth in Asia is going to be strong for the next decade or two with the blossoming of the middle class,” says Bhim Asdhir, president of Excel Funds Management Inc. in Toronto, which sponsors a line of mutual funds investing in China and India.

Asdhir cites forecasts from the Organization for Economic Co-operation and Development that show India and China together will produce 36% of the world’s gross domestic product by 2025, a considerable increase from the current total of 20%. Of the 2.4 billion people residing in the two countries, about 600 million currently are considered middle class. Based on current trends, this is expected to almost double by 2010. “And there lies Asia’s growth opportunities,” Asdhir says.

While China and India are by far the largest economies in the region, other Asian markets — Hong Kong, Korea, Taiwan and Singapore — are developing their domestic and exporting strengths. The low-cost manufacturing juggernaut of China is the engine, but the entire region is becoming more integrated and less dependent on other parts of the globe.

“Over the long term, a multitude of Asian countries have long-term economic growth potential greater than that of the U.S., Europe or Canada,” says Charles Lannon, director of global equities for Toronto-based Toron Investment Management. “We believe strongly that the countries that are committed to strengthening their regulatory institutions and that are politically stable offer the best risk-adjusted return potential.”

Mark Grammer, vice president of international investments at Toronto-based Mackenzie Financial Corp. and lead manager of Mackenzie Universal Global Future Fund, expects equity prices in Asia will benefit not only from growth in revenue and profitability but also from the narrowing of the risk premium that in recent years has generally led Asian stocks to trade at lower multiples than their peers in the developed world.

“Investors are starting to realize the risks are not as high as they’ve been attributing to Asian markets since the crisis of 1997,” says Grammer. “There has been dramatic improvement in the level of debt on corporate balance sheets, profit and cash flow are growing at an ever-increasing rate, and management teams are better disciplined. Earnings are higher than at the previous peak, in the mid-’90s, but most stock markets are still lower.”

As Asian economies mature and expand, they are moving from an export focus to a domestic orientation, and this is creating self-sustaining economies. Only about 15% of India’s GDP is export-based, which makes it relatively independent of the U.S. and other global consumers, while about one-third of China’s GDP is exported. In addition, as countries become stronger, their currencies tend to rise; the boost added to overall investment returns by exchange rate moves is further sweetening the allure of Asia for foreign investors.

“What’s changing is the recognition of long-term opportunities in Asia,” says Stephen Way, senior vice president and portfolio manager at Toronto-based AGF Funds Inc. “With their superior growth prospects and fundamentals, it is not a stretch for Asian companies to trade on parity with global markets.”

There are always risks to investing, and Asia is no exception. A slowdown in the U.S. could hurt the Asian export market. Although some fund managers are protecting their portfolios against this risk by concentrating on companies tied to Asian domestic economies, a severe or prolonged U.S. recession could contribute to fewer jobs, dropping incomes and slackening consumer demand in Asia.

“Currently, the U.S. is in a slowdown but not a recession,” says Way. “Growth in consumer demand is slowing, but jobs and wages remain strong. If the U.S. deteriorated to the point of recession, there would be a negative effect in Asia because of its high level of export activity. We would become cautious — but not bearish, as we view the long-term growth prospects as superior.”

Higher energy prices are another risk. At current levels, energy prices haven’t been an impediment to Asian growth. But rising prices would increase costs and could damage growth. Some managers have hedged against this risk by holding some Asian-based oil producers in their portfolios. And countries that are net exporters of oil, including India and Malaysia, would see their energy industries benefit from higher prices.

@page_break@Pollution is becoming an increasing problem in China, and dealing with environmental issues may increase costs for some companies in coming years.

Still, no matter how rosy the outlook, investors must be careful of how much they’re paying for future rewards. While Asia is bursting with opportunity, there are pockets of overvaluation. On a geographical basis, several fund managers cite India as a market that’s looking expensive.

Here’s a look at some Asian markets. (For more on China, see article at the top of page B12.)

> Taiwan. Valuations are attractive because of the ongoing political tension with China caused by the Taiwanese government’s pro-independence stance. If, as anticipated, a more China-friendly government takes over following the 2008 elections, the outlook will be more positive as Taiwan becomes more integrated with China. Electronics and financial companies would be major beneficiaries.

> India. India’s growth prospects are almost as bullish as those of China. Fund managers cite India’s democratic system, rule of law and educated population of young people as particular advantages. One-quarter of the world’s youth — 550 million people aged 25 years or younger — live in India, according to www.childrendatabank.org. Excel India Fund, the only fund available in Canada that focuses exclusively on India, has shown an average annual compound return of 35% for the three years ended Nov. 30, 2006. After such a strong run, some fund managers are hoping for a market correction to give them an entry point for further buying.

Companies with exceptional growth rates include cellphone supplier Bharti Tele-Ventures Ltd., State Bank of India and Associated Cement Cos. Ltd. India.

> Indonesia. Fundamentals are improving in Indonesia, with inflation and interest rates declining, and stocks still representing good value. Chuk Wong, a member of the global equities team at Goodman & Co. Investment Counsel and manager of Dynamic Far East Value, Dynamic Greater China and Dynamic Value Global Class funds, likes the outlook for Indonesian banks such as Bank of Central Asian and Bank Rakyat.

Franki Chung, head of the Asia-Pacific equity team for CIBC Global Asset Management (Asia) Ltd. in Hong Kong, likes Bank Mandiri.

The consumer sector should also benefit from increased spending this year.

> South Korea. This country is home to some world-class companies, including Samsung Corp. and Hankook Tires, the largest supplier of car tires to China. Korean stocks are attractively priced and well capitalized, fund managers say. Wong likes Doosan Intracore, the largest construction equipment manufacturer in Korea and an exporter of excavation equipment to China.

A strong currency has hurt margins on the export side, particularly for car manufacturers and shipbuilders, but firms have been grinding down costs to become more efficient, moving some production to China to do so.

> Singapore. Rising tourism and business activity in Asia are benefiting Singapore. Tourism and casino developments are popular investments, including Banyan Tree Holdings Ltd., a major hotel chain. Known as the “Switzerland of Asia,” Singapore is developing its central business district to compete with Hong Kong, benefiting commercial real estate and Singapore-based banks such as United Over-seas Bank.

Tim Leung, head of Asian equities at I.G. Investment Management (H.K.) Ltd. , also sees opportunities in pharmaceuticals and petrochemicals as domestic demand rises.

> Thailand. The country will re-establish a democratic election process in 2007, which is expected to improve the unstable political situation. AGF’s Way likes television conglomerate BEC World Public Co. Ltd., as well as PTT Exploration and Production Public Co., an offshore energy company.

> Hong Kong. Many Chinese companies are listed in Hong Kong and its stock market is benefiting from its role as a gateway to investing in China. Overall earnings growth is strong, and many fund managers like Hong Kong. Real estate and consumer-related companies are doing particularly well as a result of the regions’s growing wealth.

Some favourites include clothing designer Esprit Holdings Ltd. and Wharf Holdings Ltd., an operator of port facilities and retail shopping centres. IE