This is part of a mid-year AsianInvestor series on the investment outlook of fund managers with Asian equity portfolios.

Henry Chan is the Hong Kong-based head of Asian equities at Baring Asset Management. He is responsible for Asian investment policy with specialist research responsibilities for Greater China markets. He joined Baring Asset Management in 2004 and assumed the lead role in driving the fund house's Asian institutional mandates and flagship retail products. He became the head of Asian equities in 2006.

Barings manages around $30.9 billion worldwide, with around $6.5 billion invested in Asian equities. Chan manages around $1 billion, including the $363 million Baring Asia Growth Fund, the Baring Eastern Trust and several segregated accounts.

What are the biggest opportunities that you see in the markets you are responsible for in the coming 12 months? How are you preparing to take advantage of those opportunities?

Henry Chan
Henry Chan
Chan: We are positive on the prospects for the region. Asia has excess domestic savings and a healthy banking system, which should equip the region to ride the current challenging waves better than the West. We see many opportunities in China, hence the Asia Growth Fund's overweight position in this market.

How different or similar is your 12-month investment outlook now compared to the start of this year?

Since the start of the year, our outlook for Asian equity markets has been positive despite global uncertainties. Positives include a relatively healthy banking system, modest levels of borrowing by corporates and households, favourable long-term demographics and the commitment by all Asian governments to boost investors' confidence in Asian equity markets.

Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?

In Taiwan we moved to an overweight position on the return of domestic liquidity. The change in government leadership a year ago fosters stronger ties with China and more supportive policies to attract capital to return to Taiwan. The major theme in the fund remains a tilt towards China, based on our belief that the medium- to long-term prospects for China are highly attractive.

What are the greatest lessons you have learned from the global financial crisis and how will this affect the way you manage your portfolios?

For over a year the market was focused on macroeconomic developments and liquidity. Our investment philosophy and disciplined approach stayed firmly in place during this challenging period. As bottom-up investors we make an independent assessment of a company's ability to deliver earnings growth and understand how our view differs from the market consensus -- this is our strength and what has contributed to our long-term track record. 

How has your view of Asian equities changed since the start of 2009 when investor sentiment was generally gloomier?

We are more positive than we were at the beginning of 2009. Forward-looking economic indicators have ticked up in China, suggesting that growth could surprise positively, driven by investment and consumer spending. Company news has also been encouraging and selected companies have started to raise their earnings guidance on the back of re-stocking and better-than-expected end demand.

How has the swine flu affected your investments?

Our investment has not been affected. Asian equity markets continued to rally as improving leading economic indicators gave hope to green shoots of recovery believers. Even the outbreak of swine flu failed to dampen investors' appetite for stocks.

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

As of May 31, 2009 or weightings were:

China - 35.5%
Taiwan - 20.8%
Korea - 17.5%
Singapore - 8.9%
Hong Kong - 7.6%
Indonesia - 3.3%
Thailand - 1.7%
United States - 1.2%
Others - 1.1%
Cash 2.4%

What are your favoured markets in Asia?

As mentioned above, China is our favoured market. We have investments in several companies, in the financial sector in particular, which are beneficiaries of consumption growth in China. In the same sector, we have holdings of companies which will benefit from domestic reflation.

What are the markets you are going to steer clear of in the next 12 months?

We are cautious on those markets that are closely-linked to the developed world through trade and finance. With Western economies still in recession, Asian countries which rely on exporting to these markets are likely to find things difficult. This explains our underweight position in Korea.

Which sectors do you expect to outperform in the next 12 months?

We expect financials and real estate sectors to outperform, benefiting from Chinese domestic consumption and regional asset reflation.

Which sectors do you expect to underperform?

We are underweight in the utilities and telecom sectors as valuations are not supportive.

What are the main challenges that you expect to face in the coming 12 months?

Concerns over the severity and duration of the recession in the leading G3 economies will continue to cloud the outlook for Asia.  

What are the main risks of investing in Asia at the moment? How are you managing those risks?  

The key risks are weaker-than-expected end demand, large equity fund raising especially by financial institutions and finally a widespread flu epidemic. Our strategy has been to increase focus on large capitalisation quality companies with better earnings visibility. To reduce portfolio volatility, we use cash and index futures hedging opportunistically in adverse market conditions.