Investors are overlooking the growing risk in Asian markets from rising outsourcing and consumer debt, Citigroup Inc analysts said.
Outsourcing of manufacturing by companies in the US, Europe and Japan to emerging economies in Asia has made the region "more sensitive" to a slowdown in global demand than at any time in the past 15 years, Citigroup analysts said in a research note on Sunday.
Demand may be hurt if central banks raise interest rates, the report said.
Consumer debt is also rising, the analysts said, with domestic credit in six of 10 Asian countries equal to more than the value of GDP.
China, South Korea and India registered the fastest growth in domestic debt since 1995, said the analysts, led by Hong Kong-based Markus Rosgen.
"If these concerns regarding credit quality persist, it would be heroic to believe that the consumer would be willing to take up more debt for consumption or that the loan providers would be willing to extend the loans," they said.
Last year, domestic credit was at 99 percent of the US$13.4 trillion US economy.
In China, it has risen to 138 percent from 84 percent in 1995. South Korea's jumped to 107 percent from 54 percent while India's rose to 64 percent from 44 percent, according to the report.
The level for the euro area is 153 percent.
While consumer debt is increasing, companies are borrowing less, with net debt-to-equity levels at 23.3 percent, a 26-year low, the analysts said.
"One of the side effects" of outsourcing has been a rise in the operating leverage of companies as fixed costs increase, according to the Citigroup report.
If global economic growth is lower than forecast, high operating leverage will work against investors, the report said.
Operating leverage is the ratio that compares fixed with variable costs.
Small changes in sales have a "disproportionate effect" on the earnings of companies with high operating leverage, the Citigroup analysts said.
South Korea is the market with the highest operating leverage in Asia outside of Japan, at 2.2 times, followed by Taiwan at 1.9 and Thailand at 1.7, they said.
The New York-based bank recommended that investors buy stocks of big companies and adopt a "value over momentum" strategy.
Momentum strategy -- buying shares that are rising instead of stock of companies with the biggest earnings or cash-flow growth -- "has been great for investors over the course of the last three years," according to the report.
"Higher volatility is the enemy of the momentum style of investing and the friend of value investing," it said.