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Asian market momentum to continue

Despite the current market worries regarding a cyclical correction in commodities, investors must recognize that the foundations of the Asian commodity markets are long-term in nature and are based on the demographic, geographical and structural evolution of Asia driven by three themes: urbanization, industrialization and construction.

Our long-term thesis remains intact: Asia continues to grow at a good trend rate; commodity inventories are low and will continue to remain so.

The bottomline is that increased spending on infrastructure in Asia is badly needed, commodities are scarce and supply is lagging.

These trends will be ongoing as long as we believe that industrialization and urbanization are set to continue across Asia.

Construction growth (square meters of residential and non-residential property under construction) appears to be the main driver of steel/metals growth.

Government policy toward lending is also a critical driver of swings in base metal prices. This factor may not turn favorable until credit and broad money growth in China have come down closer to the central bank's target levels.

Domestic growth is a long-term investment story for Asia. We will capitalize on the attractive investment opportunities offered by Asia being the world's largest consumer and key producer of major commodities.

Strong infrastructure needs in Asia will continue to drive the demand for major commodities. Underinvestment in new infrastructure capacity has raised the risk of supply bottlenecks.

Rising incomes, changing diets and land/water constraints will continue to boost demand for agricultural commodities.

We continue to believe in the domestic-oriented growth story for Asia and thus in the long-term growth prospects and synergies of intra-Asian trade.

Inter-relations exist across the majority of sectors that we will invest in, whether it is cement for roads and infrastructure projects, thermal coal for power stations, coking coal and iron ore to produce iron and steel used in construction, timber to produce paper and packaging, and copper for power lines or gas and oil to produce energy.

The speed of the industrialization that we see across Asia, especially in China, will be a key driver of commodity and mining services share prices in the future.

Over the short term we do think that less pleasant economic conditions are going to be required to help rein in rising inflation.

If others turn a lot gloomier, then we shall look forward to picking our spots to step in and pick up bargains. Picking stocks at the right price is likely to be the key to investment success in the remainder of 2008 and beyond.

Over a longer investment horizon, we continue to believe in strong Asian fundamentals - sound balance sheets, high levels of savings, appreciating currencies, positive demographics, and the structural growth drivers of urbanization and industrialization.

In short, we will focus its core holdings on those stocks that offer high sustainable rates of domestic-oriented growth.

The author is head of Investor Communications, JF Asset Management.


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