This year marks the most critical sequence of events in financial history. We’re witnessing the greatest shock to the system. There’s no way to be sure of the final outcome yet, but the world will certainly be a different place after all is said and done.

Markets have reacted as expected under such circumstances. Investors, driven by extreme fear, have sold off as much as they could as quickly as possible.

Asia and emerging markets in general have paid the heaviest price, initially because they were the only markets posting big gains and eventually because of high-beta characteristics. Investors have ignored still-superior GDP growth and high return on equity these economies and companies offer.

However, emerging markets--led by emerging Asia--currently represent 33 percent of the world nominal GDP and contribute 60 percent to the global nominal GDP growth. This change is structural and will define the global economy for years to come. Consequently, current valuations are very attractive, and sentiment is bearish. Under different circumstances this would be the ultimate time to buy. The obvious problem is the unprecedented tremors rocking the so-called Anglo-Saxon financial system.

The credit crisis makes assessing the global economic slowdown more difficult, thereby diminishing confidence in analysts’ projections. The US economy is entering a recession--which will be exacerbated by the major financial crisis--so it’s easy to understand why making forecasts is difficult. But there’s still hope that a course leading out of the crisis can be charted fairly quickly, providing the US economy more leeway to combat the recession and rising unemployment, which will become a more urgent problem in 2009.

Looking at Asia, the two main investment themes are the gradual shift to a domestic demand growth model and the growth in infrastructure this effort entails.

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China is the epicenter of this change; the government’s plans call for achieving an urbanization ratio of about 65 percent in the next 15 to 20 years. This means that 350 million people will be added to China’s urban population.

According to projections, this will require construction of 700 to 900 gigawatts of new coal-fired power generating capacity, 28,000 kilometers of metro rail, 5 billion cubic meters of road and almost 40 billion cubic meters of floor space, which will require the construction of between 20,000 and 50,000 new skyscrapers.

These are staggering numbers. And if China comes even remotely close to achieving its goals, the profits from the companies involved in the process will unprecedented. For long-term investors, the main reason to continue to invest in Asia is that the region as a whole has a high savings rate and lower degree of financial leverage on both the personal and corporate level.

In addition, Asian countries have current account surpluses--India and South Korea are the exceptions--as well as strong foreign exchange reserves. They have enough room to cut rates now as needed because they had raised rates earlier in the year due to higher inflation.

In other words, the region is well equipped to weather the storm, and a repeat of the 1997 Asian Crisis isn’t in the cards. In some instances, governments will also be able to stimulate growth by directly investing, as is the case with China. See my premium service, The Silk Road Investor, for more.

Stepping in and buying during such challenging times is difficult. But keep in mind that you must make some swift moves over the short term. Allocating funds in these assets at current discounted prices should prove very rewarding a year or so down the road.

The potential success of the US rescue package could be the best news for the world’s markets. A successful implementation will mean that investors’ systemic risk perception will become more rational and, therefore, they’ll be able to judge economies based on merit--not through panic lenses.

On the market front, the case remains that Asian stocks as a whole are oversold and undervalued and would benefit from any positive news from the US.

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As things stand now, it’s rather dangerous to be extremely bearish or outright short, as markets have become tremendously stretched on the downside, and a major counter rally will occur eventually. As always, timing is the problem.

Nevertheless, Asia should outperform in such a situation, which is very difficult to imagine now given the ugliness in Asian markets. If Asian markets do spearhead a rally, I expect Indonesia, China, India, Hong Kong, and Japan to be the best performers.