Leading economic indicators continue to show activity decelerating around the world, and these trends may continue for a while longer. But indicators will improve, though not spectacularly, and markets will finish 2010 on a strong note. By the end of the summer the market will see that the global economy is on better footing than is now commonly believed. Asian markets are ready to lead the rally that’s likely to ensue, and Chinese real estate will be among the biggest winners.

South Korea, Singapore, and Malaysia should move first to the upside once the market’s collective mood changes. China is also likely to surprise, as it’s been out of favor for too long and now offers value coupled with strong growth. Look to rotate funds out of defensive stocks and into cyclical, which will benefit most when the market turns up.

Exchange-traded funds (ETF) offer broad exposure to these markets. The most desirable are iShares MSCI South Korea Index Fund (NYSE: EWY), iShares MSCI Singapore Index Fund (NYSE: EWS), iShares MSCI Malaysia Index Fund (NYSE: EWM) and iShares FTSE/Xinhua China 25 Index (NYSE: FXI).

If you desire more leverage, focus on Chinese banks and real estate companies. Real estate stocks, in particular, should outperform once the market realizes that the Chinese government isn’t ready to kill the current housing cycle.

The Chinese government has traditionally been supportive of homeownership. In the late 1990s authorities essentially transferred government-owned apartments to their occupants. After this move, the homeownership rate in China’s urban areas skyrocketed to 70 percent overnight. Current leadership has taken a similarly supportive stance. Although the government has stepped in to cool the housing market, expect authorities to do everything in their power to sustain the real estate cycle.

An increase in homeownership meshes with the government’s efforts to increase domestic consumption, as consumers must outfit their new homes furniture, appliances and other appurtenances. Even part of the increase in car sales can be attributed to new home purchases, as suburban homeowners prefer to ride to work in their cars. And the construction of new housing absorbs a portion of the workforce that otherwise would be idle.  

True, the average worker may be priced out of the downtown markets in China’s big cities. But this is a global phenomenon, and it isn’t a danger to China’s social stability or economic development. For practical purposes, many Chinese still can afford the higher downtown prices in the country’s cosmopolitan cities.

It’s also important to note that 25 percent of all housing transactions are in cash. The rest of the market operates through mortgages, where the minimum down payment is 20 percent. Many new homebuyers put down 30 or even 40 percent.

Accordingly, China’s banks have a manageable, if not necessarily small, exposure to the property sector. In 2009, loans to real estate developers accounted for 6.3 percent of total outstanding loans, while mortgages accounted for 12 percent. The banking system’s total exposure to real estate loans is slightly north of 18 percent–not a large number by Chinese or international standards.

Because the Middle Kingdom’s leaders have expanded plans for urbanized growth in the so-called second- and third-tier cities, Chinese real estate should remain in growth mode for some time.