2012 will go down as a year of solid growth for Asia ex-Japan. Across the board, countries continued growth tracks boosted by strong internal demand and low debt ratios, which more than made up for weakness from the U.S. and Europe.
Growth in the global economy will be powered by Asia, as they are not hampered by the effects of a stagnant political process and economic growth. China is expected to lead Asia with growth returning to 8%, along with Singapore (3.5%) and Hong Kong (3%), according to the World Bank, as Japan continues to lag behind the rest of the region.
The Chinese economy should be primed for a good start to 2013 as the new leadership will implement growth programs aimed at maintaining economic growth in the wake of a popped real estate bubble.
While there are some worries about Chinese real estate, one has to remember that many Chinese do not trust the stock market after two collapses, and there is no strong mutual fund area for Chinese citizens to park their funds like the United States. Companies like Vanguard and Fidelity do not exist and while there is a nascent mutual fund industry, it is very small at the present time.
Investment opportunities for the population are limited, which explains why so much money flows into real estate. Until diverse options are available and trusted by the Chinese people, money will continue to flow into real estate and gold.
In terms of the economy, growth is coming as empty containers are leaving West Coast ports in growing numbers, indicating an inventory restocking after what appears to be slow economic growth in the fourth quarter. Export orders within China confirm the port data.
My channel checks inside of China indicate that while there was a real estate slowdown in 2012, it was not as bad as 2008, and sales are beginning to rise, albeit slowly. Growth is there and it appears as though China will surprise people in the coming Year of the Snake.
As for Japan, call me when something actually happens. People have been predicting gloom and doom for the bond markets and Yen for years, and nothing has happened. The only message is a warning to the U.S. and Europe about where we are headed in the future unless the massive debt overhangs are dealt with accordingly.
Japan will remain in the doldrums, unable and unwilling to reform but nowhere near collapse, as many suggest. The "collapse of Japan" trade has been around now for more than a decade, and many a manager has lost money waiting for the trade to materialize.
At this point in time, one has to ask themselves if two changes in government, an aging population, and a natural disaster is not enough to topple Japan, then what will cause the disaster predicted by many?
That is not to say that Japan is a buy because the economy appears locked into a deflationary trap. Until something happens, it would be best to avoid it all together.
The major story for 2013 will be the forthcoming ASEAN trade group as investors look to move into select stocks ahead of the formation.
The original groups of five countries -- Indonesia, Thailand, Malaysia, Singapore, and the Philippines -- have been joined by Laos, Burma, Vietnam, Brunei, and Cambodia. The combined GDP of ASEAN ranks as the ninth largest economy in the world and an area that is seeing strong economic growth without many of the structural problems affecting the economies of Europe and North America.
As tariffs come down, many firms will be looking to expand across the region, and it will be important to discover the winners and losers.
Free trade agreements have already been completed with China, South Korea, Japan, Australia, New Zealand, and India, while an agreement with the EU is currently being negotiated.
For now, the problems that hampered the Asian countries during the late '90s are not making themselves evident at the present time, allowing growth to continue.
In terms of stocks, the most attractive opportunities present themselves from China, where the new leadership will be ready to revive the economy and work with the ASEAN members.
One of the top plays on the ASEAN theme would be through Singapore, where economic growth has slowed as the economy retools itself. One of the prime beneficiaries will be the financial sector, as their strong banking sector inspires confidence across the region. In the aftereffects of the 2008 financial crisis, Canada and Singapore were consistently rated as two of the top banking sectors in the world.
The iShares Singapore ETF (EWS) remains an attractive vehicle for investors to play the ASEAN convergence.
Years of underperformance by Chinese stocks due to worries over accounting and auditing scandals have left Chinese shares trading at a discount to their Asian counterparts. A top ETF for investors would be the iShares FTSI China 25 ETF (FXI).
The iShares MSCI Hong Kong Index ETF (EWH) currently sits close to a resistance level in the 24,000 range, which if crossed, will put the all-time high set in 2007 at 32,000 within range.
The two stars of 2012, Thailand and the Philippines, may end up being the laggards of 2013. While both economies have registered strong growth rates, investors considering the iShares MSCI Philippines Investable Market Index Fund (EPHE) and the iShares MSCI Thailand Investable Market Index Fund (THD) should recognize that both markets are known for outperforming at the end of rallies, not being the leaders of the pack.
If there is one area in the world where investors should look for diversification away from the S&P 500 (SPY), NASDAQ (QQQ) and Europe, it should be Asia, as the combination of a recovery in China and the ASEAN convergence makes the entire ex-Japan region look attractive for investors.
Disclosure: I am long some individual Thai stocks that make up the ETF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.