Asian stock markets are among the most volatile in the world and are showing signs of short-term weakness but offer strong long-term returns, according to a report by ING Financial Markets. 'Asia now has higher implied volatility ratings than the US and European markets, bar the DAX [the German stock market],' according to the report by ING strategists Markus Rosgen and Julian Leung. 'Whilst clearly uncomfortable in the near term, this is key in terms of outperformance in the future,' they say. In the short term Asian markets could fall further as liquidity - essentially the amount of money in the economic system - is expected to fall. Earlier this month US money supply grew at its slowest rate in more than seven years. On top of the slowdown in liquidity, fund managers have little interest in buying new stocks as they are almost fully invested, according to ING. Few investors also want to take on any extra risk from buying stock before the year end. Increased trade protectionism in the US is also expected to hit Asian exports and stock markets. 'The next move in the Asian markets is key. If the markets fail to regain their poise, look for this correction to continue,' according to ING. Investors are focusing more on company earnings in selecting their stocks and in the long term ING expects Asian markets to rebound. 'Excessive expectations are being wrung out of the market - this will make it easier for companies to beat their estimates for 2003 corporate earnings when they report next year,' according to the ING report. ING's long term optimism is based on the study of three previous market cycles. 'Markets get wildly oversold, as the region did in March-April, and then bounce back again,' Mr Rusgen and Mr Leung say. 'The average historic return from these lows until the first correction has been 58 per cent.' However, Citigroup's strategists disagree that liquidity is a short-term problem and are predicting Asian markets will rise further. 'While the strongest gush of liquidity flow to Asian asset markets is likely behind us, liquidity is not receding and is not a drag on Asian equities as yet,' according to a report by Citigroup's strategy team led by Ajay Kapur. 'We maintain our opinion that we are in the last leg of the current rally with a base case of about 15-20 per cent upside over the next six months.' Citigroup believes the recent deceleration in US money-supply growth will be temporary. And even if this is not initially the case, the Federal Reserve will act to ease monetary policy as the central bank remains concerned about deflation. 'US monetary policy remains easy - with the Fed more worried about deflation as opposed to inflation, any persistent decline in money supply will be met with further aggressive easing,' the Citigroup report says. Citigroup also expects global economic growth to remain strong in the next few quarters while equity analysts have generally been revising their earnings estimates upwards - both of which should support share prices. 'Based on our recent conversations with clients, there is near consensus ... that global growth will be strong in the next few quarters,' according to the Citigroup report.