THE Royal Bank of Canada (RCB) is warning investors away from Asia, encouraging them instead to turn their attention to Europe, which the bank says is likely to produce the best returns in the near term. Poor economic results in Japan, a continuing unemployment problem in Hong Kong, and weaknesses in the banking systems of many Asian countries meant Asian investment prospects would remain poor for some time, said Philip Chiu Sai-tong, senior portfolio manager for Asia, excluding Japan, in the bank's global-investment group. 'We are still negative on the short-term outlook for Asian markets,' he said. Substantial governmental reforms would be needed before the region's economies could emerge from the current slump. He called for an end to cronyism and corruption and termed these changes 'a cultural revolution'. 'It hinges on one thing . . . reforming certain Asian values,' he said. 'I would say this sort of reform takes two or three years to complete.' In the meantime, investors would do well to consider European stocks and bonds, said Vittorio Fegitz, RCB's senior European portfolio manager. Europe was just emerging from a period of poor growth, high interest rates and heavy taxation symptomatic of the struggle the 11 countries participating in economic and monetary union had waged to bring their economies into convergence. Now, however, the region was looking forward to a period of powerful growth in domestic demand, Mr Fegitz said. 'European consumer confidence is at a seven-year high.' The 11 monetary-union countries, whose ranks do not include Britain, represented the best option in Europe, he said. When the government debt of those countries was converted into securities denominated in the new, unified currency - the euro - it would create a bond market accounting for about 33 per cent of the global market in bonds. RBC is forecasting short-term interest rates between 3.75 per cent and 4 per cent and 10-year bond yields between 4.8 per cent and 5 per cent. The European Union is expected to see 2.8 per cent economic growth this year, its fastest rate since the early 1990s. RBC Investment Management (Asia)'s managing director Zoe Chang Wen-ling said SAR clients were moving investments out of the Asian markets to other parts of the world. Nearly half of those who previously would have refused to invest outside Asia had changed their minds in the past eight to 10 months, she said. 'We have seen a real switch in terms of client portfolio,' Ms Chang said. 'They are now willing to look at continental Europe.' RCB's view is that Hong Kong's stock market is still some way from recovery. Mr Chiu said foreign investors probably would stay out of the market for a while yet and deflation would continue to depress prices. 'As far as foreign investors are concerned, government intervention was regarded as something rather bad,' he said. 'They think this is a very good reason to stay away.'