AMID the general optimism over equities in Asia and the emerging markets, strategists at Barclays Wealth have sounded a note of caution over valuations in Asia. This runs counter to the consensus view that Asian growth is set to outstrip that of developed economies - a point that isn't in dispute - and that market weakness is a buying opportunity.

Says Aaron Gurwitz, Barclays Wealth managing director and head of global investment strategy: 'We see a growth story and balance sheet story in Asia. But the valuation story isn't there anymore. Stocks are fairly valued, but more often slightly expensive. We want selective and indirect exposure.' This means buying multinationals which derive at least 50 per cent of revenues from Asia.

'We have moved from an overweight in emerging markets to overweight in developed markets. We have also moved to non-cyclical stocks, and from long-term government bonds into corporate bonds.'

Asia equities delivered stellar returns last year. Even more outstanding was selected emerging markets such as Brazil, where the market more than doubled.

Citi Investment Research has just reported that fund inflows into Asia have decelerated markedly in recent weeks. In the first couple of weeks of January, net inflows to Asia were barely above US$670 million in January, much smaller than the average inflow of US$2.1 billion in the month of January between 2004 and 2007.

Inflows were dampened by policy tightening moves in China, and the strong US dollar. But the firm also expects global emerging market (GEM) funds - where cash levels were close to their all-time low of 2 per cent - to begin to replenish cash. 'As such we expect GEM funds' net purchases of Asian equities to drop in weeks ahead.'

Current correction

Manpreet Gill, Barclays' Asia strategist, says: 'We don't think (Asian equities) are an obvious buy, so it makes sense to be selective. Before the recent weakness, Asian markets were trading at one standard deviation above their long-term mean. That's not an excellent time to get in. But it's a good time to get an active manager to be selective.'

On the current correction which has erased the early gains of January, Mr Gurwitz says: 'We remain constructive on markets. Last week's action is an opportunity to buy a little cheaper.'

Coutts global co-chief investment officer Nick Cringle, however, believes Asia and the emerging markets could well deliver double-digit returns this year. He is projecting 8 to 10 per cent in returns for global equities this year.

'The strongest return has been achieved in 2009, which is the move from recession in anticipation of a recovery. . . In our view the current phase (of correction) in Asia is a buying opportunity for the medium to long term. Those with a short horizon would be advised to stay out of the market. . .

'Earnings growth is what will make valuations more attractive.' He cautions, however, that returns will pale in comparison to last year's.

The bright spot among assets in Asia is the potential appreciation of its currencies, and this too is a consensus view. Mr Gill says: 'Currencies look far more attractive than equity markets.'

Mr Gurwitz says markets are currently in a mid-cycle period that is typically stable. Markets typically rally strongly in the initial turnaround or recovery phase as they did last year; then settle into a period of relative stability before conditions deteriorate yet again, setting the stage for the next downturn.

While the mid-cycle phase is historically fairly long, his concern now - 'but not our forecast' - is that it could prove to be short this time. 'We're concerned that the next downturn could happen sooner that we'd like, but we haven't seen signs yet.'

Some early indicators of deterioration could show up in a weaker purchasing managers' index and a decline in the US housing market.

Barclays is telling clients to adjust their portfolios towards stocks that benefit in a mid-cycle phase, which include less-cyclical stocks such as pharmaceuticals, utilities and consumer staples.

The firm is also telling clients to seek outperformance through active management. In the wake of the indiscriminate selling of 2008 and part of 2009, most strategists shifted clients' funds into exchange-traded index funds. 'There are times when it is almost impossible for active managers to beat the market. But in periods of relative stability, it does matter. Rational, effective risk control, stock picking and currency picking can add value above the fees that managers charge.'

The firm is negative on sovereign bonds in anticipation of policy tightening, but it is recommending corporate paper. 'We see value in corporate bonds. Spreads widened last year to levels that were consistent with the default rates of the Great Depression.

'Spreads between government and corporate bonds are still wide by historical standards, but we expect quite positive returns. The size of the spreads and continued narrowing make up for increased bond yields, so returns from corporate bonds should be solidly positive, particularly for high yield bonds.'