* Asia stocks ex-Japan up 15 pct in 2010, Japan falls 3 pct
* MSCI world index up 10 pct on year after rocky start
* Further gains seen in 2011 if economic recovery holds
* Dollar broadly weaker, copper at record high
* U.S. economy, Europe debt crisis main risks next year
By Kim Coghill
SINGAPORE, Dec 31 (Reuters) - Most Asian stock markets
looked set on Friday to end the year with solid gains and
further advances are expected in 2011, but worries about the
sluggish U.S. economy and Europe's festering debt crisis will
likely keep investors on edge well into the new year.
While data shows a U.S. economic recovery is finally
gaining some traction, unemployment remains stubbornly high
and there are no signs that the Federal Reserve will begin to
reverse its super-loose monetary policy any time soon.
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The Fed's moves to shore up the economy this year and
record low interest rates in the West have unleashed a flood
of cheap money into riskier assets as investors seek higher
returns, a trend that is likely to continue in the coming year.
Those inflows have largely targeted faster-growing
emerging markets such as those in Asia, boosting share prices
and hobbling the U.S. dollar, while spurring prices for oil,
gold and other commodities to multi-year or record highs.
"Europe will definitely be a big focus and I wouldn't be
surprised to see a European country default in 2011," a trader
at a U.S. investment bank said.
"I think the U.S. economy will also show more convincing
signs of recovery next year, so I'd be looking to buy U.S.
dollars, maybe after March. The first quarter will probably
see a strong rally in equities, so it'll be a risk-on
environment."
The MSCI index of Asian stocks excluding Japan
inched up on Friday in thin trade, with many
of the region's markets already closed ahead of the New Year
holiday.
Despite a slide early in the year on growing worries about
Europe, and another scare late in the year as Ireland was
forced to take a rescue package, the index looked set for a
gain of 15 percent for 2010, powered largely by the region's
strong economic growth and outpacing a 10 percent rise in the
MSCI world index .
Still, the Asia index was about 19 percent off its
all-time highs in 2007 before the global financial crisis set
in.
Consumer discretionary stocks led the
charge in 2010, surging 32 percent, reflecting abundant
confidence in Asia's prospects despite lingering worries about
anaemic demand in the West.
Gains in the region were led by Southeast Asia, with
Indonesia's main stock index surging 46 percent as
foreign investors rushed in, and in East Asia by South Korea,
where the KOSPI gained nearly 22 percent despite
mounting tensions with North Korea late in the year.
Oddly, while China's voracious demand boosted global
growth prospects and commodity prices, stocks in Shanghai
missed out on the 2010 rally. The main index fell 15
percent on worries that the government would take more
aggressive measures to keep the racing economy and property
prices from overheating.
The slide in Shanghai also weighed on Hong Kong, capping
gains for the Hang Seng index at around 5 percent.
Japan and Australia also underperformed, with the Nikkei
falling 3 percent on the year as the yen rose 12
percent against the sputtering dollar, threatening to make its
exports less competitive even as the broader economy floundered.
Australian shares looked set to end the year 2
percent lower despite the country's burgeoning commodity
exports to China, but foreign investors still gained
considerably because of a 13 percent rise in the Australian
dollar against the U.S. dollar.
Shane Oliver, head of investment strategy at AMP Capital
Investors in Sydney, predicts a comeback for Australian shares
next year.
"At 12.5 times earnings, the index is now cheap based on
historic levels. The global recovery and feverish M&A activity
from cash-rich Australian firms should underpin gains next
year," he said.
By comparison, the Dow Jones industrial average
looks set to close the year with a gain of about 11 percent.
Reuters polls show investors are relatively bullish about
2011, raising equity holdings in expectation of robust
corporate earnings and increasing exposure to high-yield
credit, while cutting back on government debt. []
DOLLAR WEAKNESS TO CONTINUE
The dollar is widely expected to remain on the back foot
at least through the first quarter of 2011, with the health of
the U.S. economy and any improvement or deterioration in
Europe's debt situation seen as the main drivers for the year.
Undermined by the euro-zone debt crisis, the euro
lost some 7 percent against the dollar over the year. With no
resolution in sight to the debt mess, and fears that it could
get even worse, many analysts expect further euro weakness
early next year.
Yet, the single currency's downside has been limited by
buying interest from central banks, particularly from those in
Asia, which emerged around the $1.3000 area.
GOLD SHINES IN COMMODITY RALLY
Spot gold held steady on Friday at $1,406 an ounce,
on track for a 28 percent rise this year. Analysts see further
gains next year, possibly taking bullion to $1,500 or more.
U.S. copper futures <HGc3> shot to a record high of 439.6
cents per pound and could finish the year nearly a third
higher as a weaker dollar, strong demand and tighter supplies
boosted base metal prices.
Crude oil futures <CLc1> slipped on Friday but were poised
for a 14 percent gain this year, adding to the allure of
energy shares. But recent fuel price gains have added to
worries that inflation could flare up in the new year even as
many economies remain weak.
Many Asian central banks have steadily raised interest
rates this year to combat mounting price pressures, even as
the Fed and European Central Bank keep borrowing costs at rock
bottom in an attempt to spur demand.
For a look at major bank's economic outlooks for 2011,
click []
(Additional reporting by Ian Chua and Narayanan Somasundaram
in SYDNEY; Editing by Neil Fullick)
