Analysts say that if oil prices reach US$120 a barrel, they could shave off as much as 1.5 percentage points from Asia's projected economic growth of 8 percent this year.

Higher crude and commodity prices will raise the cost of raw materials that companies in Asia import.

With governments in Asia turning hawkish on inflation, these increased costs may be hard to pass on to consumers.

Analysts say investors will do well to select their emerging-market investments carefully.

Surging oil prices are giving a headache to Asian policy makers who are already battling high inflation.

Currently, the economies most exposed to rising commodity prices are Indonesia, India and the Philippines.

Equity investors in these countries have reasons to be wary.

Analysts say the market returns that were being projected at the start of the year may not materialise.

Sanjay Mathur, Head of Research and Strategy, Asia ex-Japan, RBS, said: "We were forecasting double-digit numbers in terms of gains.

I would think with oil prices going higher perhaps the aggregate number may not change that much but certainly users of industrial commodities will take a much bigger hit and we will see a major revision coming up there."

There are, however, some markets that could benefit.

Malaysia, a net energy exporter, is one such market.

Petronas, Malaysia's state-owned oil-and-gas company, said on Thursday its fiscal third-quarter profit rose 74 percent.

The gain was partly because of rising crude prices.

It also forecast that oil would likely remain above US$100 a barrel in the next few months.

Another emerging market where rising crude oil prices could boost corporate earnings is Russia.

Nick Timberlake, Global Head of Emerging Market Equities, HSBC Global Asset Management, said: "The long term history for the Russian market is about 9X earnings. So it's trading at a good 25 percent discount to its own history.

Today the forecasts are for about 16-17 percent earnings growth and those forecasts are based on a Brent crude oil price of US$83.

But let's say the average is US$100 for the year on Brent, so down 16 percent from the current level, so that would equate to 50 percent earnings growth from Russia this year."

However analysts are sticking to their view that Asian equities will still generate positive returns this year because of robust economic growth.

But with inflation damping sentiment, volatility may be high.

channelnewsasia.com