Ray Jovanovich is CIO at Credit Agricole Asset Management in Hong Kong. His team in Hong Kong and Singapore manages $8 billion in Asia ex-Japan equity.

WhatÆs the picture like after the May and June sell-offs?
2006 is a challenge for Asian markets. For the first time in the regionÆs modern financial history, Asian ex-Japan equity strung together three consecutive years of good performance. Can it enjoy a fourth year?

What accounted for those three good years?
Our three years of out-performance began in late May 2003, when SARS was full blown and we were running extraordinary levels of cash. We took the decision to quickly move to a fully invested position when it became clear to us that the virus had run its course. By the end of the year the markets had soared, and our early move gave us the edge. 2004Æs story was one of strong economic growth across the region, from a low base. 2005 was about liquidity, despite the FedÆs tightening.

What about now?
2006 presents a challenging picture, with tight monetary policy in the US, geopolitical turmoil, high oil prices and rising inflation in a region that still derives the critical part of its GDP growth from exports to the US. Intra-regional trade is beginning to reflect the dynamic energy of the Asian consumer, but this by no means would overcome a loss of trans-Pacific trade.

Do you see a change in AsiaÆs role in the world economy?
The basic model looks likely to continue: America consumes, and Asia, particularly China, produces. Asia recycles its export earnings back into US Treasuries, which keeps interest rates low and allows Americans to consume even more. While it is true that Asian central banks are incrementally diversifying out of US dollar assets, their existing stock is so huge that we canÆt buy the argument that they would exit the dollar for other asset classes. Asia will continue to finance the extravagance of the American family.

What about the liquidity picture?
Liquidity is a driver of the fundamental story as well as market sentiment. We believe there remains inflation in the system, and the Fed will have more work to do. But at the same time, thereÆs growing evidence of a slowdown in global growth, with exceptions in places like China and India.

How does this affect your portfolio?
Since mid-2003 weÆve maintained a zero tolerance for cash in our regional portfolios. We took our lumps like everyone else in the May/June 2006 sell-off, although our large cash level in our India fund provided a cushion there. Regionally we havenÆt pulled money off the table; the markets have been recovering nicely. But we understand that with the slowdown in global growth and continued presence of inflation, weÆll need to manage the portfolio more vigilantly. Yet we feel as though the Asian markets have further to go, at least in the coming months.

WhatÆs your main asset-allocation decision now?
This year our biggest call within a regional portfolio is to overweight Hong Kong and China, by which I mean Hong Kong-listed Chinese companies. The best access to the China story remains in Hong Kong. WeÆve visited more than 50 A-share companies and we remain unimpressed. There are inevitable leakages from ChinaÆs closed capital account that find their way south into Hong Kong as financial or real assets. Money supply in Hong Kong has surged since renminbi revaluation while more Chinese companies will participate in IPOs in Hong Kong via QDII. This story remains intact.

What sectors do you prefer in Hong Kong and China?
WeÆre biased toward property and financial companies, particularly insurance companies; we also like consumer-related plays.

What indicators will you look at to determine the sustainability of Hong Kong/China and the Asian growth story?
The upcoming blockbuster IPO by ICBC, which plans to list simultaneously $15 billion shares internationally and $6 billion domestically via A shares. The Chinese have rewritten the textbook on the art of international equity capital-raising. WeÆve been big supporters and participants of previous IPOs of banks in China and weÆre interested in ICBC. But this time, the Asian growth story will be against the background of Fed policy, weakening global growth and earnings trends of Asian companies.

What are the risks to your asset-allocation bet?
China continues to introduce measures to restrain property prices and fixed-asset investments. But implementation has not been effective. Can China moderate its economy?

Hank Paulson has now taken the job of US Treasury Secretary and he has tangible relationships with Beijing. HeÆs someone whom the Chinese trust and can talk frankly about the value of the renminbi. If he succeeds in convincing the Chinese of the benefits of letting their currency appreciate, we may see the pace of appreciation quicken.

Currency appreciation is a component of our portfolioÆs total return so I think weÆd benefit. But it may also prove to be the only effective way to slow the Chinese economy û itÆs the one tool they havenÆt tried.

Currency appreciation will pose a challenge across the region because of its dependence on exports. Asian companies will have to learn, like JapanÆs did, to cope with and succeed in an environment of appreciating currencies.

What about India?
The offering of great companies with world-class management and excellent capital structures remains compelling. The more time we spend there, the more great companies we find. ItÆs a treasure trove. One weakness is the third-world infrastructure, but therein lies an investment opportunity. We also think India must develop a viable manufacturing base in order to keep its young, growing population employed, providing opportunities. The demographic dividend is huge.