AsianInvestor has sought out Asian fund managers and asked them about their investment outlook for the coming year.

Hugh Young is managing director at Aberdeen Asset Management Asia in Singapore, which he set up in 1992 as the groupÆs Asia-Pacific headquarters. The company has around $45 billion in assets under management in Asian equities, including Japan. Previously, Young was recruited by Aberdeen Asset Management in London in 1985 to manage Asian equities.

What are the biggest opportunities that you see in the markets you are responsible for in the coming year? How are you preparing to take advantage of those opportunities?

Young: Markets are likely to remain volatile as more problems in US housing and credit markets surface. Our immediate outlook, therefore, is one of caution, and we continue to resist the temptation to chase after short-term gains at the expense of quality. We welcome any consolidation because a general decline in stock valuations will only amplify investment opportunities for bottom-up stock pickers, such as ourselves.

Have you made any significant changes to your asset allocation in terms of markets or sectors in the run-up to the coming year?

Our strategy is always to invest in well-managed, financially strong companies for the long-term. We pay little regard to short-term trends or benchmark positions. No change to our portfolio is envisaged in the immediate future.

What are your favoured markets in Asia?

As a bottom-up investor, countries are a secondary consideration to our investment decision-making. As a general observation, the more peripheral markets of the region offer better value. Historically, we have been overweight here like India û which is home to plenty of good quality companies û where valuations, while not as cheap as they once were, continue to be supported by strong earnings growth. We also favour Thailand (good value in second liners and mid caps) and Singapore (defensive quality).

What are the markets you are going to steer clear of in the coming year?

China. Valuations are trading at a substantial premium to the rest of the region and do not reflect the fundamentals. Speculation is rife, with the market capitalisation of several leading Chinese companies now exceeding that of their long-established developed world counterparts. For that reason alone, we could see the market fall sharply.

Japan. The economy is very dependent on household spending. However, wage growth is static and recovery is still constrained by falling prices and overcapacity.

Australia. A relatively mature economy with limited upside compared with the rest of Asia, and especially now as it confronts a housing-led spike in interest rates. The country's stock market offers good quality companies but this is fully reflected in current valuations.

What are your market weightings within an Asia ex-Japan equities portfolio?

China - Underweight
Hong Kong - Overweight
India - Overweight
Indonesia - Underweight
Korea - Underweight
Malaysia - Overweight
Philippines - Overweight
Pakistan - N/A
Singapore - Overweight
Taiwan - Underweight
Thailand - Underweight
Vietnam û N/A

Which sectors do you expect to outperform in the coming year?

Consumer discretionary and staples. This is due to our optimism over the growing domestic demand story, which looks sensitive at this point to US economic deterioration. We feel that over time, Asian economies will become more domestically driven and less reliant on exports.

Which sectors do you expect to underperform?

Industrial cyclical sectors such as shipbuilding and engineering, where demand appears to be peaking. Since new capacity cannot be introduced at will because of the capital investment required, the concern in these examples is that the business cycle can turn very quickly to the companiesÆ disadvantage.

What are the main challenges that you expect to face in the coming year?

External uncertainties such as global inflationary pressures fuelled by the continued spike in oil and food prices. Inflation has been hidden so far by price controls in many countries, and may need currency appreciation or monetary tightening to address. Besides this, corporate earnings will be pared if borrowing costs rise too much.

A broadening of the US credit crisis, which could exacerbate risk aversion and inflict greater damage on equity markets.

An accelerated slowdown in the US caused by falling house prices and the credit crunch.