Markets: investors told to focus on threat from Asia.

Stock markets are overreacting to the worldwide economic slowdown and should be more concerned about mounting financial risks in Asia, according to an analysis released by The Conference Board.

While the U.S. and other economies are heading for a slowdown, a recession is not in the cards. "Far more worrying are financial risks that are growing outside the U.S. and outside traditional equity and bond markets--especially in Asia," warns Gail D. Fosler, executive vice president and chief economist of The Conference Board.

In the early 1990s, investment in Asia exploded and total investment rose to match the level of savings. But after the Asian financial crisis, investment fell back to 29 percent of gross domestic product (GDP) and has risen since then--but savings have risen faster, making Asia once again a major lender. Says Fosler: "These imbalances are made worse when there are huge inflows of foreign capital to private markets. Many of these countries have high savings rates because they have less developed financial markets and institutions. There is a substantial and growing excess of savings that is misallocated globally and giving rise to huge waves of liquidity that may misprice risk in the short term and create credit and/or market crises.

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"Global trade imbalances are heavily influenced by financial motivations, which arise in part because of the inability of emerging markets to allocate domestic savings efficiently."

Businesses and governments in many Asian countries need to hold precautionary savings in foreign currencies, like the dollar and the euro, Fosler believes. This gives them a natural hedge, since these currencies are increasingly required for trade and low-cost financing.