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

Simon Godfrey is a Hong Kong-based investment specialist for Asia ex-Japan equities at Fortis Investments. He has more than 14 years of investment experience. He is currently responsible for managing the interface between equity investment centres, customer relationship managers based in Fortis Investments' international locations and external clients and prospects. 

Godfrey first joined Fortis Investments in Paris in 2005 and became the product specialist for European small- and large-cap equities as well as socially responsible investments. He was later seconded to Hong Kong in 2007. 

Godfrey is involved with the Asian Equities Investment Centre at Fortis Investments, which manages around $3.1 billion in both China equity and Asia ex-Japan regional equity strategies in the form of open-ended funds and mandates.

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?

Simon Godfrey
Simon Godfrey
Godfrey: The opportunity remains in the timing of the domestic economic recovery. We still see the major opportunities being the infrastructure, consumer and property stocks across the region.

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

At the start of the year, we saw the region's equity markets at highly oversold levels, with severely negative macroeconomic momentum.

Valuations are now fair -- the risk rally ran its course in the first part of the year, now we see the regional average P/E stabilising at around 14 to15 times. This is a significant re-rating and it means that the next leg of the rally will need to be driven by more sustainable factors, particularly a broad-based economic recovery including domestic demand, investment and exports. However, despite the strong run-up on panic buying since the beginning of the year, we don't see Asian markets having reached their full potential and could benefit from further inflows medium-term.

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

As soon as the China PMI (purchasing managers' index) started to improve markedly, we started to build exposure to sectors sensitive to fixed asset investment and consumer spending due to various fiscal measures there. We also increased exposure to stocks in markets which had become deeply undervalued along with their currencies, particularly Korea and India. Over the last couple of months, we have been moving out of beta recovery plays, into more growth-type stocks -- adding consumer, property, infrastructure in the region as a whole.

Profitability and growth investment styles are coming back after value outperformed massively over the last six months.

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

During the crisis liquidity was pulled much more quickly from the market than could have been anticipated. Stocks with good fundamentals may suffer disproportionately from this phenomenon, which reached an extreme level in late-2008. So we pay much more attention to position-sizing in stocks which could suffer from illiquidity during such times where we are seeing a low diversification of the investor base.

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

We were quite upbeat, even then. What we saw then was an extreme oversold level and a potential for the cycle to turn quickly.

Our fundamental view on the region has not really changed. That is to say that Asia remains one of the most diversified emerging market stories, with high growth, relative political stability and positive demographics. And to exploit the secular growth trends, you need to be invested in the best companies, hence the need for a stock-picking approach. So we are still positioned for incremental decoupling.

How has the swine flu affected your investments?

We are not invested in tourism-related stocks, therefore we have not felt a direct impact on the portfolio. The healthcare names in our universe are few (0.5% of the index) and anyway do not benefit directly from this factor in a major way.

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

China - 31.82%
Hong Kong - 8.57%
India - 13.51%
Indonesia - 4.83%
Korea - 16.27%
Malaysia - 1.21%
Pakistan - 0%
Philippines - 0%
Singapore - 4.40%
Sri Lanka - 0%
Taiwan - 11.93%
Thailand - 1.67%
Vietnam - 0%

What are your favoured markets in Asia?

China, India and Indonesia. These three markets not only have the largest populations, but the largest projections for growth this year. Their economies are the most domestically focused and a mix of stimulus and domestic economic recovery should feed into strong earnings growth in sectors such as retailing, consumer goods, materials.

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

As we invest on a relative basis, we tend to underweight markets rather than being completely un-invested. Some of the smaller Southeast Asian markets, such as Thailand or the Philippines seem less able to stimulate domestic demand and still rely too heavily on exports.

Korea and Taiwan are also vulnerable, as their economies are more export-oriented. This is not expected to recover particularly strongly this year.

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

Domestic demand is still driving investment in the region. We like consumer discretionary and property names particularly at present.

Which sectors do you expect to underperform?

Information technology had a good run at the start of the year and we participated in that to a certain extent, though visibility has now turned downwards for the sector. We are underweight. In the materials sector we remain quite selective, as some commodity prices have been driven up to levels not explained by underlying demand on the back of a recovery in the oil price. Our preference goes to raw materials stocks with exposure to infrastructure projects.

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

The US and OECD (Organization for Economic Cooperation and Development) cycle. Asia is still very dependent on exports, despite the various stimulus efforts by governments across the region. Therefore, we need to see tangible signs of recovery in US employment, housing market and consumer sentiment indices over the second half of the year; otherwise sentiment could turn negative again.

In the near-term, there is a risk of some pull-back in the third quarter as earnings for some of the more cyclical sectors -- notably materials and IT -- could disappoint if the recovery is muted.

Valuations in certain sectors and countries may become stretched in such a liquidity-fuelled rally. Some commodity, shipping and industrials stocks have risen by such huge amounts this year for example.

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

Foreign liquidity can be fickle and change direction quickly. The increased rate of inflows over the first half of the year could reverse in the short-term. This causes higher volatility in the underlying equity markets than can be justified by fundamentals. However, we still think that structurally there will be increased buying interest as more international investors target the secular opportunities in the world's fastest growing region.

Within such a vast and diverse region as Asia, there is always some risk of political upheaval somewhere, even if the political risk premium as whole is subsiding.