Last year, Southeast Asian markets were flooded with investors looking to capitalize on their mercurial growth. But swollen Asian economies are now raising fears that outsized inflation will lead to increased interest rates, putting the brakes on progress and a damper on investors' gains.

As demand in emerging markets in the region rose, prices soared. While this is great for stockholders in the near-term, it's problematic as goods start becoming too expensive to be bought. Now, it's a near-certainty that Asian central banks will intervene in order to force price reductions, and markets are reacting.

In India, sky-high food prices sparked anxiety over interest rates, leading to a sharp drop in the Sensex last week. Since the start of 2011, Indonesian stocks have declined close to 7% on concerns that inflation hasn't been properly addressed. Meanwhile, Bangladesh, which raised interest rates back in December to slow growth, saw riots break out following last week's 9% market dip, bringing the year-to-date fall to 20%.

And according to many analysts, the correction isn't over yet. Foreign investors who raced to Southeast Asian markets in 2010 have gotten nervous over high stock valuations, rising interest rates, and inflation, says Nirmal Jain, chairman of financial services firm India Infoline Group.

And Grace Tam, VP of investment services, JP Morgan Asset Management in Hong Kong, projects a volatile 2011 for these Eastern markets, as once-cheap valuations in Indonesia and India have now become relatively expensive.

So, which Asian stocks should you be avoiding? One way to find ideas is to look at what the short-sellers are doing. Short-sellers sell high in order to buy low, by borrowing shares from other investors, selling them on the open market, and closing the short by buying back the same number of shares initially borrowed. If the short-seller can buy back the stock at a lower price, turns a profit off the difference. Simply put, they bet on their stocks to lose.

Short-sellers tend to be a bit more sophisticated than your average investor. After all, they're taking on unlimited risk because they (theoretically) have unlimited downside -- if the stock keeps rising, they keep losing. So it's not a bad idea to pay attention to their trades. (Click here to access free, interactive tools to analyze these ideas.)

Here's a list of Asian stocks that saw the largest increase in shares shorted over the last three months. 

Company

Industry and Country

Short Float and Short Ratio

Shares Shorted Between 9/30 - 12/31

Lihua International (Nasdaq: LIWA)

Copper company based in China

Short float at 13.88%, which implies a short ratio of 7.11 days

Shares shorted increased from 1.02M to 2.11M

Avago Technologies Limited (Nasdaq: AVGO)

Semiconductor company based in Singapore

Short float at 7.58%, which implies a short ratio of 6.25 days

Shares shorted increased from 2.01M to 8.5M

Yingli Green Energy (NYSE: YGE)

Solar company based in China

Short float at 49.09%, which implies a short ratio of 3.58 days

Shares shorted increased from 5.93M to 12.09M

JA Solar (Nasdaq: JASO)

Solar company based in China

Short float at 20.17%, which implies a short ratio of 3.02 days

Shares shorted increased from 12.25M to 26.71M

Trina Solar (NYSE: TSL)

Solar company based in China

Short float at 10.22%, which implies a short ratio of 2.01 days

Shares shorted increased from 3.41M to 7.12M

Verigy (Nasdaq: VRGY)

Semiconductor company based in Singapore

Short float at 5.75%, which implies a short ratio of 1.99 days

Shares shorted increased from 1.48M to 3.47M

Short trends data sourced from AOL Money.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.


Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.

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