Manila - Emerging Asia's capital markets are starting to stabilize, but their recovery could be lengthy and hard amid uncertainty over the global economic downturn, an Asian Development Bank (ADB) report said Tuesday.

The Manila-based ADB urged the region's relatively resilient economies to help the equity, bond and currency markets recover as the global crisis ebbs and investor appetite returns, by improving regulation and supervision.

"Building vibrant, resilient money markets in the region will require authorities to ensure market confidence, depth and liquidity, while consistently updating the supervisory and regulatory environment," the Asia Capital Markets Monitor said.

The report said the region's financial markets have shown "signs of a tentative recovery, as valuation indicators have begun to look attractive."

"The financial outlook for Emerging Asia is less bleak than for other regions," the report said. "Any sustained recovery, however, could be delayed as uncertainty over the severity and length of the global financial crisis and recession weighs down investor sentiment."

The report covers China, Hong Kong, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam.

It noted that net equity outflows had slowed significantly in the first quarter of 2009 compared to the second half of 2008, signalling that foreign investors are now far less pessimistic than they were about the region's prospects.

For the full year of 2009, net private capital flows to the region were likely to remain positive, although much lower than in 2007 when inflows hit a record high, the report said.

But equity prices were down nearly 42 per cent year-on-year as of March 31, with markets in India, Indonesia and Thailand faring the worst. Over the same period, the Dow Jones Industrial Average lost only 16 per cent.

"Most emerging Asian currencies fell sharply against the US dollar due to heightened risk aversion and massive de-leveraging," the report added.

Jong-Wha Lee, head of ADB's Office of Regional Economic Integration, which published the report, said the recent turmoil in Asia's markets highlights the "close interconnection" between markets and economies around the world.

He added that the downturn has underlined "the need for governments and the financial sector globally to continuously improve regulation, oversight and risk management processes."(dpa)