Excluding Japan, Asian markets are up 95 percent since they bottomed in October 2008. Although the correction I’ve forecasted has yet to transpire, such a pullback is still in order; a pause would enable market participants to step back and assess the stream of information issued by analysts and companies, providing a solid foundation for a strong finish to 2009.

As it stands, the markets still need to make it through September and October, a period of seasonal weakness. We’ll soon find out if these months will bring a meaningful correction or if stocks will just muddle along.

On the economic front, it’s becoming clearer that the Federal Reserve is in no hurry to tighten monetary policy–a view I’ve held for months. That should continue to buoy the US economy and act as a positive for stocks.

Contrary to prevailing concerns about inflation, deflation actually poses the biggest threat to the US economy. This danger will become clearer once we have a better picture of how much deleveraging the US households are willing to do.

But this is a longer-term issue. For now, investors shouldn’t be too negative about the markets; the time for shorting or outright selling will occur much later in the year. I expect that over the next 12 months, emerging markets could achieve and perhaps eclipse the all-time high reached in later 2007 (see the graph below).

Source: Bloomberg

The global economic recovery will be the driving force behind this outperformance, though the long-term ramifications of the policies undertaken by the world’s central banks will be decidedly negative for quite a few economies.

And analysts are feverishly revising earnings estimates for next year to account for margin expansion. In total, earnings are expected to grow 28 percent in 2010. Companies in emerging markets are leading the way; analysts expect earnings to grow an average of 30 percent.

The rally in emerging market equities has been broad based, though the Chinese market has led the way. But next year country and stock selection will become increasingly important to the asset allocation process. Expect “sustainable growth” to become next year’s buzz phrase.

Over the long haul, Asia will remain the main growth driver for the global economy because its economic fundamentals are still strong. By and large, households and companies in Asia have solid balance sheets, unencumbered by crippling debts; these nations can afford to focus on improving productivity and other structural changes, investments that translate into real economic growth–as opposed to outlays to patch up a broken financial system.

Asia already suffered through its own financial crisis in 1998, when banks went under, businesses small and large went bankrupt and entire countries appeared to be on the brink of collapse. Over a decade removed from this period, Asia’s financial system is now in a position not only to support its domestic economies but also to lend a helping hand to the US and Europe. After all, the US Treasuries these countries have bought over the years allow US authorities to pursue a flexible monetary policy.

After years of building their savings, households in Asia are ready to spend. High demand for housing is the obvious example; increasing demand for cars and other big-ticket goods make the point even clearer.

On the other hand, the lack of infrastructure in many parts of Asia (India, Indonesia, The Philippines, Vietnam, etc.) has created a huge need for investment in these sectors. Without that investment, the region’s economic growth potential will be hamstrung.

Asian economies have entered a cycle of capital investment, infrastructure spending and domestic consumption that’s still in its early stages. I recommend that investors buy into Asia for the long-term, preferably during periods of weakness and general skepticism about the region’s ability to sustain its economic growth.