Asian shares will likely remain under pressure from the financial turmoil in the US even if the region has relatively small direct exposure to the credit crunch. Louisa Lo, head of Asian equities at Schroder Investment Management, remains cautious but she believes that there are vast opportunities for long-term investors to accumulate shares of fundamentally sound companies in the region.

Lo expects economic growth in Asia to slow further and earnings to disappoint in the coming months as slowing external demand feeds through to this export-intensive region.

Earnings disappointments are expected to pose the greater risk for share price valuations.

ôAlthough there has been a raft of revision downgrades in the year-to-date, consensus expectations are still far too optimistic and we would not be surprised to see a further leg down, particularly towards manufacturing companies as high input costs squeeze margins and as sluggish sales bite,ö Lo says. ôCorporate earnings growth could very likely turn negative.ö

Despite expectations of an economic slowdown in Asia, Lo notes that the region is ôundoubtedly in much better shapeö today than it was during the turmoil in the late 1990s.

ôHaving already undergone its own deleveraging process in the aftermath of the Asian crisis, we do not see any systemic risk this time around,ö she says. After all, AsiaÆs foreign reserves are higher, external debts lower, household balance sheets are relatively strong and companies are generally more disciplined.

ôWhatÆs more, we remain confident that domestic consumption will be a key long-term driver for the region supported by continued urbanisation and a burgeoning middle-class,ö she adds.

The financial turmoil is also overshadowing other positives, Lo notes, including falling commodity prices, particularly oil.

Inflation has ôvery likelyö peaked and monetary tightening with it, she says. This should give policymakers room to prop up growth, as well as alleviate corporate margin pressures.

Meanwhile, China has already reversed years of monetary tightening by cutting lending rates and the reserve requirement ratio for smaller banks. Further fiscal pump-priming measures look likely while receding inflation has also enabled Taiwan to ease. Concerted efforts by governments across the region to shore up flagging markets including tightening curbs on short-selling while increasing buy-backs by Asian companies should provide additional support.

ôWhile it makes sense to be defensively positioned, we think that there are opportunities to gradually add some risk back on the table as the markets look significantly oversold,ö Lo says.

The MSCI Asia ex-Japan index is now trading at valuations of 1.7 times price-to-book, which is close to its 10- and 30-year average, while the trailing price-to-earnings ratio is at around 10 to 11 times.

ôAt such levels, we are seeing plenty of opportunities for the long-term investor, any improvement in confidence should be particularly beneficial to the region, which looks much better placed than the West with few leverage problems and where liquidity among banks is not an issue.ö Lo says.

Although Lo expects continued volatility in the markets as event-driven risks rise, she notes that ôlooking beyond that, we believe now could be a good time for investors to pick up quality companies with good long-term prospects cheaplyö.