For the past three years, global markets (developing and developed) have been in a bull market. There's been a debate along the way if this is a cyclical or a secular bull market, but no one has denied the fact that it is a bull market. After all, the world's markets are up more than 70 percent (price appreciation in US dollars) during this time. As 2006 approaches, investors are starting to ask if the run will continue.

The majority of market participants seem to think so. Markets are priced for good growth and subdued inflation. At the same time, analysts are predicting double-digit earnings growth, expanding margins and lower costs.

Given the generally good sentiment in the markets, any unforeseen disappointment--even a small one--could lead to substantial corrections. The question is whether such an outcome will be temporary or will bring a more serious downturn. The answer? No one knows.

Investing is action, and this is the time of the year to identify investment themes for 2006. Our full analysis and global portfolios will be offered in our new advisory, to be launched in January. But as we promised in September (see Asia - 29 September 2005), this issue presents some of the companies we're looking at in the Asia-ex-Japan region, as well as the updated ranking with regard to Asian markets.

Asia remains our favorite long-term story in the global economy. Short term, the region could experience some profit taking or a negative shock--especially if the US fails to deliver on growth. That said, Asian economies as a whole are looking quite good and are delivering solid growth numbers. True, there are pockets of legitimate worries but, overall, the region is strong.

There are two main reasons for this strength. First, demand from China and Japan has offset the slowdown in export growth to the US--down to 2.2 percent year-over-year in the 2005's third quarter.

The second reason is the Asian consumer. The region is trying to develop a stronger regional consumption environment. And although the US is still the important factor, a lot of data, including the above-mentioned trend, show a changing pattern. Exports will remain the centerpiece of consumer strength in Asia, but the continuous global demand and regional activity will add to the consumer's purchasing power.

Keep in mind that Asian bank deposits have been growing by 11 percent a year. There are $2.8 trillion in deposit accounts, excluding China. Including China increases the pool by $3.5 trillion. Although not all of this money will be spent, the fact of the matter is that there's the potential for it. And as written before, there are early indications that point toward this direction.

Looking into individual markets, Hong Kong remains our favorite in Asia because there's still strength in domestic demand. Companies of interest include HSBC (NYSE: HBC) and HK & China Gas (OTC: HOKCY).

Singapore's story is one of growth and return of cash to shareholders via increasing dividends and stock buybacks. Singapore Telecom (OTC: SNGNY) is one to look at.

In Malaysia, the reforms in the government-linked corporations (a big part of the market) keep going, expect this to continue reflecting positively in the market. Use the exchange traded fund (ETF) iShares Malaysia (NYSE: EWM) for exposure.

South Korea has performed much better than we expected because of the increased interest domestic investors have shown. We prefer domestic-related stories, such as Kookmin Bank (NYSE: KB).

India remains our favorite long-term market in Asia but, truth be told, it's due for a breather. We continue to prefer the banks; investors should take a look at HDFC Bank (NYSE: HDB).

Taiwan (see "Taiwan - 10 November 2005") is a market that not a lot of investors like. Still, it should perform well if technology holds. United Microelectronics (NYSE: UMC) remains the most interesting play.

We don't recommend exposure to Thailand, Indonesia, the Philippines or China at this time.

True, markets won't be without risk next year, and we'll have a full list of them in January. The major risk is over-tightening monetary policy by central banks, as well as a real estate market collapse.

Another major risk is protectionism. If the world economy gets sucked into this game, the results will be extremely disappointing, not only for Asia but for the world. Protectionism is a political animal and intense politician involvement in economic and market affairs always leads to one outcome: disaster.

Finally, as we promised before, in the next issue we'll offer some of the surprises that could take place next year. These are themes that the majority of investors don't find attractive but we either do or think there's a bigger probability of their profitability than the current consensus says. The idea is that if some of these themes do materialize, profits will be above what other investors will be making.

© 2005 Yiannis G. Mostrous
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