Economic activity in asian countries is expected to move ahead at a brisk clip this year. There are, however, signs of moderation, due to weakening global growth and the delayed impact of previous inflation-fighting measures by various governments.

Regional gross domestic product growth forecasts average 7%, and China and India will remain in the lead, acting as stimulants for smaller economies in the region. But manufacturing activity in China shrank in November for the first time in almost three years, and Taiwan and South Korea also have seen manufacturing decline.

“China is the largest trading partner for countries in the region,” says Eng Hock Ong in Singapore, portfolio manager of AGF Asian Growth Class fund, sponsored by AGF Investments Inc. of Toronto. “And if growth slows in China, everyone else in Asia is affected.”

However, he says, most Asian countries are benefiting from strong domestic demand, and there is lots of scope for governments to employ local stimulus policies if world growth slows. As well, manufacturing of low-end, mass-produced goods is spreading beyond China to countries in which labour and land costs are lower, such as Vietnam and Bangladesh, enlarging their middle-class populations.

“There is low sovereign debt throughout most of Asia, and prudent fiscal budgets,” Ong says. “Corporate borrowing is also low and balance sheets are strong. Stock markets have seen sell-offs due to rising investor risk aversion and a pullback to the U.S. dollar, but I expect that trend to reverse as the European debt crisis dies down.”

Philippe Langham, head of emerging-markets equities with RBC Global Asset Management in London and manager of RBC Emerging Markets Equity Fund, prefers the markets of Indonesia, Philippines and Thailand, as they are less exposed to global trade than the big exporters, Taiwan and South Korea. Langham is tilting the AGF fund’s portfolio toward domestic consumption. Indonesia-based Astra International, for example, is a diversified conglomerate that distributes Toyota cars in Indonesia, and has a 55% share of that automobile market.

“As the Asian countries develop,” Langham says, “people are expanding spending beyond consumer staples, such as food, and becoming interested in discretionary items, such as automobiles.”

Here’s a look at a handful of Asian markets (except China, which is covered on page B12):

> Indonesia. One of the favourite countries among fund portfolio managers, Indonesia has a strong economy and an upwardly mobile population of about 250 million. With inflation under control, interest rates are dropping, stimulating consumer spending. Heavy government spending on infrastructure is also fuelling activity.

“Indonesia is made up of a series of islands, and the infrastructure is being put in place to connect them and build power plants,” says Tim Leung in Hong Kong, who manages Investors Pacific International Fund, sponsored by Winnipeg-based Investors Group Inc. “The country is following the model of China. Individuals are seeing their incomes improving and housing prices are rising.”

Indonesia is endowed with natural resources, including oil, gas, rubber, coffee, tin, gold, palm oil and coal, says Leung, and is strategically positioned to feed growing appetites in China and other Asian countries. Among the IG fund’s holdings is natural gas company PT Perusahaan Gas Negara.

Mark Lin, vice president, international equities, with CIBC Global Asset Management Inc. in Montreal and manager of CIBC Asia Pacific Fund, also likes the Indonesian natural gas industry. The CIBC fund has gained exposure through Woodside Petroleum Ltd., an Australia-based company with operations in Indonesia.

Another of Lin’s favourites is Bank Rakyat Indonesia, a profitable bank whose shares also are held by Dynamic Far East Value Fund, sponsored by Toronto-based Dynamic Mutual Funds Ltd. and managed by Chuk Wong. This bank has a strong deposit/loan ratio and is a leader in rural lending and microfinancing.

Wong also likes AKR Corp., In-do-nesia’s largest fuel distributor.

> Thailand. The Dynamic fund’s second-biggest weighting is in Thailand, which Wong describes as a “contrarian story.” The country has been plagued by a series of disasters, including a military coup, demonstrations and floods.

Among the Dynamic fund’s holdings are Siam Commercial Bank Public Co. Ltd. and Asian Property De-velopment Ltd. (The latter concentrates on urban Bangkok.)

Ong likes the health-care sector, which is benefiting from a wealthier population as well as foreigners seeking less expensive medical treatment. The AGF fund holds shares in hospital chain Bangkok Dusit Medical Services PCL.

> Hong Kong And Singapore. Fund portfolio managers are less bullish on Hong Kong, which is still experiencing sky-high residential property prices, a bubble in danger of popping. But there are still opportunities.

Leung prefers retail/commercial property developer Wharf Holdings Ltd., which focuses on shopping malls, and Bank of China (Hong Kong) Ltd., which he describes as a “channel” for currency movements and is benefiting from the increasing use of the Chinese yuan for international payments.

Lin favours Hong Kong Exchan-ges & Clearing Ltd., one of Asia’s major stock exchanges and a “profitable monopoly.” Stock exchanges, he says, are a play on the finance business, but they don’t face the same risks as banks, which could suffer from bad loans in an economic slowdown. Lin is playing the same theme in Singapore, investing in the Singapore Stock Exchange, which is benefiting from international money inflows and the rising tide of Asian wealth.

“Singapore is the Switzerland of Asia, a key financial centre but with warm weather,” Lin says. “It sits between China and India, so it’s flying on two wings.”

> South Korea. The AGF fund has a significant weighting in South Korea; Ong says some of its exporters are presenting serious competition to the Japanese. The AGF fund invests in Hyundai Motor Co., tapping into growing demand for automobiles in Asia and globally. Ong also favours LG Household & Health Care Ltd., which makes household products and cosmetics and recently bought the Coca-Cola franchise for South Korea.

Lin’s CIBC fund also has holdings in South Korea, including stakes in Megastudy Co. Ltd., which runs schools and produces online study programs.

> India. Atul Penkar, manager of Excel India Fund, sponsored by Excel Funds Management Inc. of Mississauga, Ont., expects economic growth of at least 7% in 2012 in India. That will be driven primarily by the booming services sector, followed by agriculture, industrial and manufacturing.

Exports are not a major facet of the Indian economy, so the country is less vulnerable to a global slowdown than those that rely on trade. The key concern in India is its high inflation rate of 9.7%; but, after a series of interest rate hikes in the past year, inflation is expected to level off. Food inflation has decreased, due to strong monsoons that have helped farmers.

Penkar likes banks, including ICICI Bank Ltd., HDFC Bank Ltd., Axis Bank Ltd. and Indusind Bank. He also favours energy, including oil and gas giant Reliance Industries Ltd. and gas distribution company Indraprastha Gas Ltd.

Another favourite sector is pharmaceuticals, which is benefiting from increased domestic demand, exposure to global markets and growing demand for generic drugs. The Excel fund holds shares in Dr. Reddy’s Laboratories Ltd. and Sun Pharmaceutical Indus-tries Ltd., among others.

The Excel fund’s largest holding is software firm Infosys Tech-nologies Ltd., which is experiencing a positive effect on its outsourcing business, due to recent depreciation of the rupee caused by skittish investors pulling out of emerging markets’ currencies.

> Pakistan. Pakistan is a frontier market, plagued by a lackluster economy and political instability. Wong has, however, uncovered a gem in United Bank Ltd, a well-run bank that trades at five times earnings and boasts a 10% yield.  IE