WITH ECONOMIC PROSPECTS improving across Asia, it is time for the next stage in the recovery cycle and this one has investment implications for where you might put your money in the stock market. The key to it is that economies and stock markets are absolutely alike on one fundamental consideration. They run on money. If there is plenty of it around, they have the fuel to continue steaming ahead. If money is pinched, the steam will lose pressure. Unfortunately, as the first chart shows, we still seem to be on the wrong side of this equation at the moment in most countries. I have excluded the two giants: China because it had no recession from which to stage a recovery and Japan because it marches to its own drummer. The trend is clear among the smaller economies, however. The year-on-year growth of money supply on the M2 measure, which was at more than 20 per cent 15 years ago, steadily declined, then collapsed in the 1998 financial crisis and is still below 5 per cent at present on average. All of the countries in the sample show the same general trend. It is too low a figure to sustain continued economic recovery. It will either have to rise or economic growth will be pinched. My bet, going on historical evidence that cyclical changes in money supply growth tend to lag cyclical changes in economic growth by a few months, is that M2 growth will soon be up. In fact we already see indications of it in the countries that have published money supply figures later than the cut-off date of August in the chart. The next question then becomes where this money will go and the second chart suggests a likely answer. Fixed capital formation, which was running at an average of more than 33 per cent of gross domestic product (GDP) six years ago, is now down to below 23 per cent in our country sample. There is nothing odd about this. Domestic investment normally slows down during difficult economic periods. Big capital spending plans are put on hold when money is tight. With economic recovery this changes. The demand for that delayed investment in plant and equipment soon becomes pressing and the money to make that investment also comes back with the surge in money supply growth. This has several further implications. The first is that trade surpluses will decline as the necessary imports of capital goods rise. Current account surpluses which now average 6 per cent of GDP in our sample, are sure to come down and, as they do so, the screams of protest from the United States about Asian trade imbalances will subside. We could do with that. At the same time, the build-up we have seen of Asian foreign reserves over the past five years will slow down. The money will be used for investment at home rather than in the debt instruments of the United States government and this is no bad thing. Asian foreign reserves have more than doubled over the past five years to more than US$1.6 trillion, a trend that borders on the ridiculous. But back to that pick-up in capital investment. Some of the growth in money supply will go to consumer spending, of course, but personal consumption expenditure did not fall much during and after the 1998 financial crisis and will not rise much with the recovery we now see. The big surge will be in capital spending. And if I now still had a team of investment analysts working with me I could give you some direct ideas about stocks across Asia that will benefit with the coming capital investment push. I no longer have that team, unfortunately. All I have now is a laptop and an internet connection. You will just have to ask your stockbroker for any ideas that his research analysts can supply along the theme. But focus them on that capital investment push, however much they may want to distract you with other picks of the day. Although it is not a short-term bet, it is a fairly sure one and you will see confirmation that you are on the right track as those M2 growth rates start to rise.