One fund manager predicts that Japan and Taiwan will be the bull markets this year. Still, punters should be wary of market volatility and minimise exposure to Asian markets that could be affected if US interest rates were to be increased next month, according to Paul Pong, managing director of Pegasus Fund Managers.

Although Mr Pong is bullish on Asia for the next 11 months, he cautions investors to watch for pitfalls in the first quarter and steer clear of markets such as Hong Kong, which could get hammered if the US Federal Re serve raises interest rates above expectations. Market-watchers believe that the Federal Open Market Committee will raise interest rates by 25-basis-points.

'The sell pressure in Hong Kong is still high and I think the trading range will be 15,000 to 16,000 before Chinese New Year,' Mr Pong said. 'But as we approach February's US Federal interest rate announcement, the Hong Kong market will test 14,700. The last time Nasdaq corrected, the market closed at 14,700.' Just how much the Federal Reserve will increase interest rates depends on the US markets. On Friday, the Dow fell for the fourth straight day. However, if the US economy continues at its record-setting pace, some stiff medicine can be expected.

'The higher the US market, the more the interest rate increase will be and the more the correction will be in Hong Kong's market,' Mr Pong said.

He advises investors to hold and wait.

If Hong Kong stays above the 14,700 level, or 'double-bottom' as he calls it, investors should buy into companies that are likely to benefit from China's admission to the World Trade Organisation: technology plays and those with cyclical strength.

'The multiplier effect of these stocks is very strong,' Mr Pong said.

His stock picks: China Telecom, Bank of East Asia, HSBC and Pacific Century CyberWorks.

In Japan, where corporate restructuring is continuing and the yen has been gaining ground against the US dollar, the market has also been on the ascent. The dollar traded at 104.68 yen on Friday.

Jardine Fleming notes that in the October- December quarter, 'the Nikkei 225 climbed 11.7 per cent, while the Tokyo Stock Exchange First Section marched upwards 18.7 per cent with the Second Section advancing 6.6 per cent'.

Mr Pong expects Japan to be one of the 'gems' of the year because it is relatively unaffected by US interest rates and has undergone a culture change in terms of economic restructuring and a new spirit of entrepreneurship.

'The Japanese market has already turned around,' he said, while pointing out that government fiscal stimulus packages have attempted to shore up the economy.

He said deregulation, restructuring of companies and mergers reflected a changing Japan.

Puru Saxena, an investment consultant with Richmond Asset Management, rates Japanese sector funds among the year's top picks. He expects the high returns of Japanese sector funds last year to continue.

Fuelling the boom is a restructuring at the grass roots level, with an emphasis upon earnings and US-style stock valuations.

'The Japanese realise that the stock price of a company is like a currency,' he said. 'The stock price represents the value of a company.' Among Mr Saxena's favourite picks in Japan: Jardine Fleming's (JF) Over-the-Counter fund with a 675 per cent year-on- year gain, JF's Japan Smaller Companies fund with a 592 per cent gain, or Invesco's GT Japan Enterprise C fund with a 460 per cent gain.

The only threat to a full Japanese recovery is a strengthening yen. Mr Pong believes it's unlikely the US dollar will weaken with higher US interest rates on the way and international funds still flowing into US markets.

'Concern about a higher yen is not there, so it will not stop the export-led recovery,' he said. 'We think the trading range for the Nikkei has moved to 18,000 to 22,000 by the end of year. If the Japanese market can breach the 22,000 level, I think the bull market will be for certain.' As far as Taiwan in concerned, strong global demand for computer components will turn the economy into one of the year's hottest performers, Mr Pong said.

Sandra Lee, head of brand development and strategic planning, Jardine Fleming Unit Trusts, is also bullish on Taiwan. She believes global PC manufacturers will continue to outsource, creating strong demand for components and semiconductors.

'Taiwan has a niche in providing this kind of hardware,' she said. 'If we are convinced the technology boom is there, then Taiwan is well positioned.' Taipei will also get a liquidity boost from fund managers who follow the book. Ms Lee said many fund managers were looking to increase their weighting: 'Fund managers who work close to the benchmark indices will look towards Taiwan as a more secure position for their Asian portfolio.' On the downside, Pegasus' Paul Pong said investor affection for technology stocks might have run its course and the 'stratospheric' valuations could fall to more realistic levels.