ASIA IS STILL NEAR THE “SWEET SPOT” of the cycle for stocks, currencies and corporate credit as economic growth will likely rise in the next two to three quarters supported by low interest rates, US-based investment banking giant Merrill Lynch said.

In a Sept. 11 commentary titled “Trading the Cycle,” Merrill Lynch said several Asian economies were already moving to the “overheat” phase of the cycle—China, Hong Kong, Taiwan and Thailand. On the other hand, it said the Philippines, along with Korea, Malaysia and Singapore, remained in the “recovery” expansion marked by “strong growth but only modestly rising inflation.”

Merrill Lynch kept its gross domestic product growth forecast for the Philippines at 1.4 percent this year and 2.5 percent next year, cited as among those avoiding a recession this year along with Indonesia, which was projected to grow 3.6 percent this year and 4.8 percent in 2010.

But Malaysia, Thailand and Singapore were seen contracting this year by 3.8 percent, 3.5 percent and 5 percent, respectively, before returning to positive territory next year (at 4.2 percent, 2.9 percent and 4 percent).

Driven by China, it said emerging Asia led the global recovery and would probably help spearhead the monetary tightening cycle. But as the Asian upturn matures, concerns were growing about the sustainability of growth, the return of inflation and the potential for rate increases, the research said.

“Asian stocks and currencies do well in periods of high or rising growth. Policy tightening only matters if it is intense enough to affect the growth outlook,” it said.

It said China would likely grow 8.7 percent this year and 10.1 percent in 2010, noting that this large economy was already pulling its weight on the rest of the region.

“The next driver of demand is the much-anticipated turnaround in the G3 (United States, Japan and Europe). Our work on Asian trade shows that exports to the G3—which traditionally lead the global manufacturing cycle by a few months—have remained disappointingly flat. However, confidence, lead indicators and shipment-inventory ratios suggest a sharp turnaround in Asian exports within the next few months,” it said.

Merrill Lynch said it did not expect a return of goods price inflation as there was too much spare capacity in the global economy.

However, it said central banks could begin exiting from the emergency monetary stimulus introduced late last year. The tightening process, it noted, would likely be led by Australia, China, India and Korea. China’s tightening would probably take the form of restrictions on credit and investment rather than adjustments in benchmark policy interest rates.