This is part of an AsianInvestor series on the 2009 investment outlook of fund managers with Asian portfolios.

Raphael Wu is a Hong Kong-based associate director for investment at Credit Agricole Asset Management (CAAM). He joined the fund house in 2002 and is responsible for managing several portfolios for local pension funds and institutions investing in the Asia-Pacific universe. He has also been managing the CAAM Funds Asia Pacific Renaissance portfolio since September 2004. In total, he is responsible for managing around $1.3 billion in assets.

CAAM manages around $646 billion in assets worldwide, including Ç4.7 billion in equity investments in Asia.

What are the biggest opportunities that you see in the coming 12 months?

Wu: We see China as the market with biggest opportunities in coming 12 months. 2008 has been a challenging year for China as it faced economic challenges from both domestic demand moderation and an external slowdown that hit its manufacturing and exporting sectors. Risk to a wider income disparity has also emerged and become the latest issue for the government in an effort to address economic balances. While we share the above macro concern, we believe China has the greatest policy flexibility to stimulate the economy via active accommodative monetary policies and aggressive fiscal stimulus. The economy should lead Asia in the next cycle upturn and we see a tremendous level of opportunity for investment in the medium term.

How has the global financial crisis affected the way you manage your portfolios?

CAAM has started to reduce risk budget since the negative impact from the credit crisis started to surface at the beginning of the year. Our portfolio strategy remains very cautious in view of our findings of a potential prolonged global economic downturn and where market participants are still too optimistic.

What is the biggest lesson you have learned from the US credit crisis?

A prudent, pragmatic portfolio management approach to long-term investment is deemed to be extremely crucial and necessary during this extraordinary period of the ongoing US credit crisis. We remain fully invested as the current market level is already at crisis valuation from the last 15 yearsÆ perspective. We maintain low tracking error strategy in the fourth quarter of 2008 and focus on large-cap, liquid blue-chip stocks rather than alpha ideas.

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

For CAAM Funds Asia Pacific Renaissance, we have slightly increased our exposure in Japan. The Japanese economy is defensive and its equity market is very well positioned compared to the G3 markets.

We also like the currency û that the Japanese yen could stay strong in the near term as interest rate differentials narrow when global policy rate eases aggressively. While there is clearly downside risk to earnings, we believe valuation is very supportive in the longer term.

The portfolio has further increased its weightings in defensive sectors in Asia, including the pharmaceuticals, the telecommunication and the domestic food companies. We believe many of these companies are going to benefit from falling raw material prices and are able to deliver very stable earnings growth in the medium term.

What are your favoured markets in Asia?

China is our favourite market since it has plenty of policy flexibilities in both fiscal and monetary settings. We are focusing on stocks with high dividend yields, strong balance sheets and proven business models or industry franchises as we assume global economic conditions to be very challenging in the coming three quarters.

What markets are you bearish over?

We are bearish over Korea and Thailand. We are concerned about the financial conditions of Korean banks and exporters in the midst of the current economic slowdown. The currency weakness in the Korean won carries substantial negative shock and pressure to the system. Looming risk to rising credit risks and SME defaults also bring additional concern to the profit outlook of the Korean banking sector. In Thailand, we are unsure about the current political situation and its impact on domestic sectors.

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

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

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

On a sector-basis, we are overweight telecoms and technology. We also like large-cap banks with deposit franchise and loan pricing power, mainly in Singapore and China; insurance and property stocks in China on further monetary easing policies; and leading exporters in Korea and Taiwan.

Which sectors do you expect to underperform?

On a sector-basis, we are underweight industrials and materials. We are also limiting our exposure to small-cap stocks.

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

The main challenge for the coming year is the real impact of the US credit crisis on Asian economies. Economic outlook has deteriorated very rapidly on the back of the credit crunch around the world. This will undoubtedly lead to further downward earnings revisions in Asia, although we are still convinced that long-term fundamentals are solid where we see plenty of room for policy initiatives from Asia to offset the steep downturn in the US and the European economies.

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

Asia is strongly correlated to global markets and is at the mercy of the size and direction of the global pool of liquidity. Excess capital outflows will undoubtedly bring collateral damage and volatility to the Asia markets.