UBS research examines opportunities and risks in Asian for global investors. UBS' latest research report, Asia's Ascent, focuses on the growing commercial and financial ties between Asia and the rest of the world.

To find proof that global financial markets are increasingly taking cues from the region you don't have to look any farther than the worldwide flutter that stemmed from a sudden sell-off in China's domestic equity markets last month, says UBS.

Big and varied

Although outsiders should keep in mind that there are important differences between countries, the overall outlook for economic growth in Asia remains quite positive.

In its country-by-country analysis, UBS identifies three trends connected with Asia's strong regional economic and earnings growth that investors can benefit from. Asia's dominance as a supplier of goods and services to the global markets will likely remain unchallenged. In fact, this position should continue to develop as other newly emerging Asian countries embrace export-oriented economic policies of their own. Asian urbanization will require massive infrastructure spending to ensure the provision of basic services and to maintain high rates of productivity growth. Not only will per capita incomes continue to rise in many emerging and newly industrialized Asian countries, but increased levels of affluence will likely translate into growth in spending and credit demand.

Meanwhile integration of Asia's national economies into the global commercial and financial system is occurring alongside an evolution in the region's financial markets. Although developments vary widely across Asia, certain trends are visible in many locations. The size and liquidity of Asia's equity markets are increasing, and earnings growth is increasingly reflected within the region's equity market performance. However, in many Asian countries corporate governance standards are still weak, and equity markets exhibit higher volatility than stocks traded on developed country exchanges. While profit margins may remain higher than in the past, they are unlikely to expand and provide further support. With Asian countries less likely to continue providing disinflationary impulses to the world economy, liquidity will most likely not remain as supportive of risky assets. Asia's local currency bond market is growing rapidly. Countries are seeking to develop a liquid benchmark yield curve to improve access to fixed-income markets among corporate borrowers. Global bonds offer limited interest income, and yields are likely to follow a slowly rising trend because of rising inflation expectations and more limited support from foreign capital inflows. Listed real estate is becoming an important financing vehicle in the region, and many markets have strong underlying fundamentals. Growing Asian demand for commodities means more business opportunities for commodity trading exchanges in the region and commodity importers. Asian industrialization and urbanization creates a positive environment for commodities through the end of the current decade. Global demand for commodities is expected to remain robust, while supply constraints are unlikely to be relaxed anytime soon.

UBS offices in 50 countries, with about 39% of its employees working in the Americas, 35% in Switzerland, 16% in the rest of Europe and 10% in Asia Pacific. -FWR

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