This is Asia’s investment moment

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Asia's large capital inflows are not a one-week wonder. The stellar performance of the region's equity markets last week is just an acceleration of the existing trend.

The key stock market index for Asia is up 10.2 percent since the beginning of the year (compared with 2 percent for the Dow and 0.5 percent for the euro area),and a whopping 19.3 percent over the last twelve months (compared with 13 percent for the Dow and 10 percent for the euro area).

And Asia looks like it is just warming up: Its key equity markets gauge is trading at about 13 times estimated earnings, compared with P/E ratios of 16 and 15 in the U.S. and Europe, respectively.

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Can Asia's equity prices sustain this remarkable climb? I believe they can.

Some of Asia's asset price gains will come by default.

Europe– to quote Hungary's Prime Minister Viktor Orbán – continues to "shoot itself in the foot" with a sanctions war it can't win, while Germany keeps obstructing every attempt to stimulate the euro area out of a quasi recession and a devastating unemployment. The German economy, its vice-chancellor says,will soon be pulled up by rising exports (to Asia, no doubt). These are great examples of European mismanagement and of a total lack of solidarity.

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On the other side of the Atlantic, fears are growing about America's fully valued equity markets. Investors are anticipating rising interest rates and disappointing profits in a sluggish economy.

These two "defaults" will probably get more prominent in the coming months. But Asia's investment inflows will be mainly motivated by well-founded expectations of higher returns.

China, India and Indonesia

If you discard long-standing – and totally wrong – warnings about China's collapsing economy, you will easily conclude that with a growth rate of 7-8 percent the Middle Kingdom will remain a formidable engine of regional economic development. The growth-focused India and a reassuringly well-managed South Korean and Indonesian economies will also contribute to Asia's steady upswing in the years ahead.

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These four Asian countries account for 26 percent of global gross domestic product(GDP).

This number simply means that Asia has a large growth potential in intra-regional trade,with a perfectly solvent demand from countries that have a long way to go to catch up with the rest of the developing world.

India seems to me a particularly promising investment destination. The country's new leadership is firmly focused on better economic management, with emphasis on infrastructure, food security, education and healthcare. The central bank and the finance ministry now appear to be working with greater mutual support and understanding than in the past, and India's present readings of internal and external balance provide good initial conditions for further improvement.

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China and Japan are likely to step up their investments in India. That will help to close India's savings-investment gap (estimated at about 2-3 percent of GDP) with stable long-term funds instead of relying on short-term capital inflows. If properly channeled, these Chinese and Japanese investments could also speed up infrastructure improvements, relieve some supply bottlenecks and significantly raise India's economic efficiency.

India's emphasis on a peaceful and friendly neighborhood – i.e., relations with China and a broader "Indian world" -- could also yield economic dividends.

Indonesia, the largest Southeast Asian economy, has similar problems of poor infrastructure, especially in power generation and power transmission.

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The newly elected president is pledging to continue his predecessor's efforts to invest in infrastructure as he targets a 7 percent economic growth to improve social welfare and modernize this sprawling archipelago.

That will be a big challenge, though. Raising the growth rate from an average of 5.5 percent since the middle of last year will be impossible while the policy focus remains on bringing down external deficits (3.3 percent of GDP) and price inflation (4.5 percent in July).

Indonesia, however, has been able to pleasantly surprise in recent years. Thanks to structural reforms of the economy, it achieved improvements in price stability, public sector accounts and external balance while maintaining a growth rate of about 6 percent. The new president seems intent on continuing these reforms through better tax collection, better infrastructure and a tighter control of public spending.

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Strong regional trade

Will these Asian countries be negatively affected by the slowing growth in the developed economies and the expected increase in U.S. interest rates?

Some negative impact is inevitable when the growth slows down in one-half of the world economy (U.S. plus the EU).

But, as said earlier, the buoyant domestic demand in Asia will provide expanding markets to support more robust regional trade. That trend has been underway for some time. The trade liberalization among the ten Southeast Asian nations (ASEAN) has stimulated a double-digit trade growth within that group. The intra-ASEAN trade is estimated to have exceeded $600 billion last year. ASEAN is China's third-largest trading partner; their bilateral trade is now thought to be somewhere in the neighborhood of $350 billion.

The negative impact of rising dollar interest rates has also been exaggerated. India and Indonesia could possibly experience some difficulties because they have to finance current account deficits of about 3-3.5 percent of GDP. These deficits, however, are still relatively low, and they can be easily funded with direct and portfolio capital inflows.

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Investment thoughts

India and Indonesia received particular emphasis in this discussion because I believe these economies will offer good long-term investment returns. Equity prices in both countries have increased by more than 20 percent since the beginning of this year. Further gains are quite likely with faster growth in the years ahead.

China is the regional growth engine whose domestic demand has a prodigious growth potential. South Korea will probably be its biggest beneficiary.

Japan, unfortunately, has reached a point where its huge monetary stimulus has hit diminishing returns as a result of structural blockages, weak household incomes and higher sales taxes. Exports could provide some respite if a dangerous standoff with China (in the South China Sea) could be resolved in a peaceful manner. Also, Japan's sanctions against Russia have probably killed trade and investment deals that could have greatly helped the country's weakening economy.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

Follow the author on Twitter @msiglobal9