How solid are growths in Asian economies?

Growth in countries like Singapore may have persisted owing to tremendous local stimulus, but financial markets remain tightly linked across the globe.

Asia is not immune to financial trouble elsewhere. The recent stabilization of output, especially in smaller markets like Singapore, owes much to America's restocking bounce, but wobbly exports leave especially smaller economies highly exposed to any gyrations in financial markets.

Analysts think strong growth will prevail, but this could lead to higher inflation and hike in interest rates. Asia is still dependent on how Europe will play out.

Here's more from Frederic Neumann, Co-head of Asian Economics Research, HSBC:

Has Asia gone low beta? Tempting thought. And many seem to think so. Investors across Europe all appear of one mind: Asia has become a dull part of the world, chugging along reasonably well, with few obvious risks, but little imminent reward. Juicy returns, so the consensus, are to be had elsewhere. Well, not so fast. As any veteran Asia watcher will readily attest: the region never stays boring for long.

First, Asia is not immune to financial trouble elsewhere. The second half of 2011 was a powerful reminder of that. As European banks scrambled for dollars, they also squeezed markets in Asia. Things have stabilized of late, mostly thanks to LTROs, but another round of Eurostress would whip about Asian markets as violently as before. Volatility hasn't suddenly disappeared from the scene.

Second, as solid as growth currently seems, it remains sensitive to the global industrial cycle. The recent stabilization of output, especially in smaller markets like Singapore owes much to America's restocking bounce.

Third, wobbly exports leave especially smaller economies highly exposed to any gyrations in financial markets: the weaker trade is, the more important is local demand, but this depends crucially on sentiment. Stronger markets help, weaker ones don't. In recent years, Asian growth may from time to time have decoupled from the West owing to tremendous local stimulus, but financial markets have remained tightly linked across the globe.

Fourth, inflation is bubbling away beneath the surface. Suppose Europe holds it together in the coming months, possibly with the help of further easing by the ECB. In this case, Asian growth and regional markets would again roar. But price pressures would explode as well. And more quickly so than in previous cycles.

What's the most likely outcome? Our view is that strong growth will prevail and quickly lead to higher inflation and ultimately interest rates hikes. But, the downside risks are equally apparent. Another Euro-bust would quickly put the squeeze on Asia as well. Much depends on how you see Europe play out. On that, we'll leave you to judge. But one thing is clear: Asia will not stay dull for long. Why, then, is "vol" so cheap?