This is understandable because US economic news continues on the downside, and market participants remain unsure of the credit crisis and its outcome.

We’re currently in the third significant rally since last November’s high. It has already surpassed the previous two rallies by 5 and 2 percent, respectively. Technically speaking, this is a typical bear market rally. But it’s too early to tell if we’re turning for another leg lower, which a lot of pundits now expect.

Without underestimating the danger, I still maintain that this will be a difficult year for the markets, but agility and good stock selection will help investors achieve positive returns.

For more on the 2008 Asian investment story, see Silk, 2 January 2008, The Year of the Rat; Silk, 9 January 2008, Difficult Times for Longs; and Silk, 27 February 2008, A Year of Consolidation.

Nevertheless, the big issue to which investors want answers is how to quantify the downside for Asian markets. Asia can drop 20 to 25 percent from current levels. This doesn’t necessarily mean that it has to drop, but if things get ugly, this is how it should play out.

Any weakness in Asia–especially of that magnitude–will offer another opportunity to buy into this strong bull market.

But because positioning net long is a dangerous game these days, I recommend hedging your long exposure. See the Permanent Hedges section of the Portfolio for details.

Given current valuations, Asian banks seem to have less downside potential than the majority of the other sectors, telecoms and utilities excluded. Note that I’ve favored both Asian and Russian telecoms for quite some time, and I’m still bullish for the sector.

Compared to the rest of the region, investors have steered clear of banks for some time now. Therefore, they don’t command high valuations because their re-rating has been timid and slow. They trade at a discount to the region on the basis of price-to-earnings and price-to-book ratios and offer a much higher dividend yield than the market as a whole. 

Banks are the second least-favored portfolio holding in Asia, following the energy sector. The loan-to-deposit ratio for Asian banks is around 70 percent, which means that their deposits are still sufficient to cover lending, and, consequently, there’s more money to support growth. In the US and Europe, the ratio is above 120 percent.

There are three Asia ex-Japan banks in the Silk Portfolio: Bank of China Hong Kong (Hong Kong: 2388, OTC: BHKLY), South Korea-based Shinhan Financial (NYSE: SHG) and Singapore-based United Overseas Bank (OTC: UOVEY).

These banks aren’t expensive on the aggregate. The average dividend yield is at 3.1 percent, the average price-to-earnings is 13 and book values are at 1.8. Although these aren’t low, valuations aren’t as expensive as the rest of the market. And banks are also a play in one of my favorite long-term Asian themes: domestic demand. Bank of China Hong Kong, Shinhan Financial and United Overseas Bank are buys at current levels.

Yanzhou Coal Mining (Hong Kong: 1171, NYSE: YZC) recently announced its 2007 numbers; profits rose by 36 percent to USD462 million. 

Although the company doesn’t expect an increase in volumes for this year, earnings should rise substantially because prices will be much higher. Yanzhou has contracted less than 30 percent of its coal for this year at prices that are higher by 38 percent year-over-year.

The remaining coal will most probably be sold at spot prices which are already 25 percent higher year-over-year. Management expects an average price increase of 38 percent year-over-year for the whole of 2008. This can be achieved because demand remains firm and global supply is still weak. In addition, the company is achieving a better product mix with more clean coal.

The company plans to export a negligible amount of its coal because the domestic market is strong enough to absorb its production at very attractive prices. I expect that first quarter results, which will be released next week, should confirm a good start for the year. Yanzhou Coal Mining remains a buy.

China Mobile (Hong Kong: 941, NYSE: CHL), one of the largest mobile service providers in the world with 369 million subscribers, reported strong first quarter 2008 results with revenue up 19.7 percent and net profit up 37.2 percent year-over-year at USD 3.5 billion. Earnings margins were also high at 53 percent and are pointing toward a strong year; profit growth should also be strong at around 40 percent growth.

The company’s main advantage is its strong revenue growth, which allows for good earnings visibility, a big plus in difficult times. 

China Mobile remains a core holding of the Silk Portfolio due to its strong subscriber growth and the big opportunity for growth in rural areas where the government has been instrumental in increasing the standard of living. Buy China Mobile.

Mobile TeleSystems (NYSE: MBT) reported fourth quarter 2007 numbers with revenues up 5 percent on a quarter-to-quarter basis at USD2.33 billion, and income up at USD460 million.

Income fell short of estimates, and the stock initially reacted negatively. It has since recovered and should perform stronger; part of the margin weakness last quarter was due to growth spending and seasonality.

Note that revenue was strong across the board, especially in Russia. And as this action continues, margins (currently at 49 percent) will improve as the year progresses.

The company offers great exposure to the growth story in Russia, Eastern Europe and Central Asia because it’s the largest cellular operator in Eastern Europe with 50 million subscribers. It has licenses in 87 Russian regions, the Ukraine, Belarus, Uzbekistan and Turkmenistan, covering a population of more than 233 million people. Mobile TeleSystems remains a buy at current prices.

The investment process is constant. So if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the Portfolio tables for details.

• Russia (energy, telecommunications)
• Hong Kong (banking, real estate, infrastructure)
• India (pharmaceuticals)
• Philippines (telecommunications, real estate)
• Singapore (banking, telecommunications, industrial)
• China (consumer, telecommunications, machinery, oil, e-commerce, coal)
• Taiwan (ETF)
• South Korea (banking)
• Japan (banking)
• Cambodia (casino/hotels)
• Macau (casino/hotels)