Invest in Asia for 2010?

Overseas markets and exotic investments may sound much more exciting than the tried and true financial environment of home that you are familiar with.

But plonking your money in your own backyard may not be a dull option at all.

In fact, the Asian region - excluding Japan, which is regarded as a developed market like the United States - should be one of the first areas where Asians in search of investment opportunities should look.

Emerging Asia is enjoying much better growth prospects than the West and Japan.

This is something that international portfolio managers have started cottoning on to, and they have begun allocating more funds to the region.

Seven years ago, the Asia ex-Japan region accounted for barely 3 per cent of the widely followed MSCI World Index - or to give it its full name, the Morgan Stanley Capital International index, which is a global stock market index - but today, that share has nearly tripled. But even this proportion is small, given Asia's superior growth potential compared to other regions and its significant share of the world economy.

Today's Asia is not what it was two decades ago. Thanks in part to the 1997/98 Asian financial crisis, the region has gone through drastic changes - and for the better.

Many governments and corporations were brought to their knees , leading to significant restructuring and belt-tightening. This has bolstered reserves and strengthened Asia's financial position, allowing it to weather the current global financial crisis better than the West.

Corporate governance in Asia has also improved markedly. Companies recognise the importance of greater balance-sheet transparency and safeguarding shareholders' interests, and have done a lot to promote investor relations.

Ironically, the current financial crisis has been another blessing in disguise for Asia, as it has highlighted the region's strengths to international investors, resulting in a significant flow of money into Asian bourses this year.

The net inflow in Asia ex-Japan funds so far this year already stands at more than US$15 billion (S$20.8 billion), and may even exceed the US$16.8 billion that poured in during the 2007 bull run.

This flood of funds into Asia has helped markets in the region outperform their developed peers by a wide margin this year. In the year-to-date, they have soared by 40 per cent to 90 per cent, compared to only about 10 per cent to 20 per cent for developed markets.

Asia's policy response to the present crisis has also been impressive, and this has helped the region recover faster from the global downturn than developed economies.

The International Monetary Fund (IMF) expects developing Asia to grow by 6.2 per cent this year, compared to a 1.1 per cent decline for the world economy. Next year, growth in developing Asia is expected to gain pace to hit an impressive 7.3 per cent, double the IMF's 3.1 per cent growth projection for the world economy. And Asia's economic prosperity looks set to continue for several years.

The gross domestic product of China is expected to equal that of the United States by 2030, said Minister Mentor Lee Kuan Yew, who spoke at a National University of Singapore forum last month.

And US Federal Reserve chairman Ben Bernanke told a conference in California recently that 'Asia appears to be leading the global recovery. Recent data from the region suggests that a strong rebound is, in fact, under way'.

Asia is clearly not facing the same hang-ups as the West and this crisis has boosted its worldwide profile and appeal among global fund managers.

Asia ex-Japan may make up only a small proportion of global fund managers' portofolios, but its weighting in the world economy is significant - close to 25 per cent.

Its share in global funds will increase significantly over the next decade or more as more global fund managers shift money from the West to the East. This will underpin regional markets and help Asia to outperform its Western peers in the medium to long term.

In terms of valuations, many Asian markets may seem fairly valued at the moment, based on current year earnings. However, if investors take a three- to five-year timeframe, bourses in the region are still attractively priced for the medium-term investor relative to growth prospects.

However, this does not mean that Asian markets come with no risk. On the contrary, Asian equities are more suitable for those with a strong risk appetite.

Markets in the region are prone to speculative inflows and outflows as they still do not have the same depth as developed markets. Consequently, big movements of capital in and out of bourses can cause Asian markets to whipsaw.

But if you are able to withstand such volatility, Asia is an attractive proposition. There is a lot going for the region - the banking sector is in a better shape than that in the West, its consumers are under-leveraged and have excessive savings, companies are lowly geared and resilient to a downturn, and governments have the means to launch further stimulus packages, if need be.

So, if you have the risk appetite and are prepared to take a view of five to 10 years, there is no need to look further afield.

Asia will no longer play second fiddle to developed markets. It is emerging rapidly from the shadows of the West and will take the lead in the coming century. The sooner investors realise this, the better.