The economies of continental Asia, which have seen annual economic expansion in the 6%-8% range for several years, are poised for continued strong growth in 2006, as long as key risks — falling export demand, rising inflation and political instability — remain largely at bay.

“Right now, Asia is one of the most attractive regions in the world in which to invest,” says Stephen Way, portfolio manager at Toronto-based AGF Funds Inc. “We’ve been overweighted there for quite a while.”

Korea is the favourite play in the region for a number of money managers. They also see opportunities in Hong Kong, Singapore and Taiwan, as well as in China. India, however, is viewed as expensive, and there is less enthusiasm for Thailand, Indonesia, Malaysia or the Philippines.

A big plus for Asia is the massive restructuring of companies, particularly banks, since the financial crisis of the late 1990s. Corporate debt is down significantly, cash flow is strong, return on equity is up and dividends are increasing.

“Some corporations in the region will actually be in a cash position at the end of the 2006,” Way explains. “It begs the question: what are they going to do with all the cash? It could lead to mergers and acquisitions in the region; it could lead to increased dividends; it could lead to capital spending.”

Most managers say reliance on the export market is the biggest risk to the region’s economic outlook, making it vulnerable should the expected slowdown in the U.S. prove more severe than anticipated. “As much as Asian countries hate to admit it, they are extremely dependent on U.S. consumption,” says Mark Grammer, vice president of investments at Toronto-based Mackenzie Financial Corp. He says many of the goods Asian countries trade among themselves eventually are exported to the U.S.

Way, however, thinks increasing domestic demand is making the region more self-sufficient. “Asia is very well placed to weather a very lacklustre global growth environment,” he says.

Grammer acknowledges there are signs of improved domestic demand, but he does not think it is enough to offset significantly the reliance on exports.

The spectre of inflation combined with rising interest rates is also a risk. Energy, resources and commodity prices, which generally skyrocketed in 2005, hemmed in growth and boosted costs somewhat. But inflation in most countries was less than 4% last year. With healthy current account surpluses in the region and currencies that most money managers believe are undervalued, Asian governments have the flexibility to keep inflation in check, either through higher interest rates or by allowing their currencies to appreciate.

Political risk is always present in the region, but according to Chuk Wong, investment counsel at Toronto-based Goodman & Co. , advisor to Dynamic funds, it is at a low ebb. “Recent developments suggest geopolitical risk is actually falling,” he says. Wong is cautiously optimistic that the negotiations between North Korea and the U.S., China, South Korea, Japan and Russia over North Korea’s nuclear weapons program will yield positive results. He also feels China-Taiwan tension and India-Pakistan tension are easing. “But investors have to remember: in Asia, geopolitical elements are always a factor,” he adds.

Here’s a look at the individual countries.

> China (also see page B14). China is the engine of the region, with growth centred on its strong exports to North America and Europe. Although economic data coming out of China is notoriously unreliable, most money managers agree the Chinese economy has been growing at 8%-9% a year. Growth should stay relatively steady, with perhaps a 1% dip, as the export market cools. However, China is a tough place in which to invest directly.

> Korea. “Of all the countries hit by the financial crisis in the 1990s, Korea has made a spectacular comeback,” says Wong, who likes the country’s valuations at 10 times future earnings, with earnings growing at double-digit rates. The country has a current account surplus, and its domestic consumer market is slowly emerging.

Many Korean companies have gone through painful restructuring. Their debt/equity ratios are now very low, and management has shown itself to be more responsive to shareholders’ interests by cutting costs, increasing revenue and paying out dividends.

The darling of the Korean market is Samsung Electronics, which most money managers own. “I just look at it as one of the best value stocks out there,” Grammer says. “Its balance sheet is pristine — if anything, too strong; it is overcapitalized right now. Its product line is fantastic. Its brand image has risen faster than any brand in the world, other than maybe Google. Because of Samsung, Korea is significantly overweighted.”

@page_break@Wong, who has a big position in Korea, also owns Hyundai Motors and Kia Motors, in which Hyundai has 38% stake. Both have performed well and have increased market share in the U.S.

LG Card, a credit card company badly hurt by a consumer credit card bubble a few years back, is another of Wong’s picks. Following its recent restructuring, Wong believes, it is now set for growth.

Way owns Posco, a Korean-based steel company, a play on global steel prices.

> Singapore. Way views the city state as an example of an economy that is diversifying and developing domestic demand. “Over the past 40 years, Singapore has transitioned itself from a manufacturing centre to a more service-based economy,” he says. He points to two major multibillion-dollar casino and resort developments in Singapore and the redevelopment of the central business district as drivers of investment in the local economy.

Wong likes Osim International Ltd., a manufacturer of massage chairs that are popular as a lifestyle upgrade: “It’s very strong regional brand in Asia, trading at roughly 12 times forward earnings.”

Timothy Leung, head of Asian equities in Hong Kong for I.G. Investment Management Ltd. , owns Keppel Corp., the world’s leading manufacturer and contractor of offshore oil rigs, a play on world oil demand.

> Hong Kong. Prospects for property, a key economic driver, will be good, at least once interest rates stop rising. Franki Chung, head of the Asia-Pacific equity investment team in Hong Kong for CIBC Asset Management Inc. , is underweighted in banks and property as he waits for signs that U.S. rates, to which local rates are tied, are peaking.

Grammer agrees that property will do much better once rates stop rising. He says there are pretty good growth prospects for the next three years because of developments already started. Leung, who owns developer Cheung Kong (Holdings) Ltd., expects the real estate market to remain relatively buoyant.

> Taiwan. The Taiwanese government may pursue writing a new constitution this year, which could cause a flare-up in tension with China. However, there is also a potential improvement to China-related economic policies that should benefit the domestic economy.

Chung is bullish on the technology sector, which, he believes, will see 30%-plus earnings growth this year, after a 20%-plus decline in 2005.

Wong owns Tsann Kuen Enterprises, the world’s largest manufacturer and supplier of small appliances and a major electronics retailer in the country: “It’s like Best Buy in North America.”

Way has elected to stay out of Taiwan for now, simply because he has not found any companies that interest him. He says, though, that the country is “starting to improve in terms of the quality of businesses we see there.”

> India. Some managers are leery, saying the market is expensive. “India has had a fantastic run,” Grammer adds. “We had positions in Indian companies, and we unfortunately exited those positions too early. But I’m not rushing back into the market. I’m concerned that the Indian market has run ahead of itself. The prospects in India are very good. But the biggest problem is infrastructure — it’s lacking.”

Wong is more bullish: “There are indications to suggest that India is the next China, meaning that it can sustain fast growth for many years to come.” He admits, however, he has a hard time finding Indian companies with valuations that interest him.

One company he owns is Mastek Ltd., a Mumbai-based information-technology services company benefiting from the global outsourcing trend. Wong says the company is trading at 10 times forward earnings.

> Thailand. The country doesn’t look very appealing on either the political or economic fronts. Its stock index is still less than half the value it reached in late 1993; it has experienced social unrest from time to time; it is carrying a current account deficit; and inflation is running at more than 6%.

Nevertheless, managers see some upside to Thailand. “It probably offers pretty good opportunity, because a lot of the problems are slowly getting behind it, and you still have fairly robust economic growth,” Grammer says.

Wong owns Robinson’s Department Store, the largest retailer in Thailand, which went through a good deal of restructuring following the financial crisis.

Way, who owns oil firm PTT Exploration and Production Public Co. Ltd., a play on the global outlook for energy prices, and media company BEC World PLC, says Thailand is relatively cheap, at 11.6 times earnings and 1.9 times book.

> Indonesia. Most managers have shied away from this region because of its history of social unrest. But, Wong says, the political situation appears to have stabilized. He owns Bank Central Asia, one of the biggest banks in the country, although it is now foreign-owned. The bank went bankrupt, was taken over by the government and restructured. Recently, it traded at 10 times earnings, with a 4% dividend yield.

> Malaysia. This market has been relatively disappointing, according to Way, although the country is the region’s only net oil exporter. He owns Resorts World Bhd, which has a monopoly licence to run a casino outside Kuala Lumpur.

> The Philippines. Money managers largely have stayed out of the country, saying the market is too small and the political situation too unstable. IE