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

Francis Chung is a Hong Kong-based Asia product specialist at Halbis. He joined the firm 12 months ago, focusing on Asian equity portfolio construction and product management. The Halbis Asia ex-Japan team manages more than $28 billion in Asian equities assets.

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?

Chung: This is a difficult time for investors everywhere, and Asia is no exception. Markets have dropped significantly from their highs in late-2007 and Asian investor sentiment is uncertain. Concerns over a global slowdown, the ongoing ramifications of the credit crisis and inflationary pressures continue to place downward pressure on markets.

On the positive side, valuations in markets such as India and China have returned to what we view as more reasonable levels and we continue to believe that the regionÆs structural foundations are sound.

AsiaÆs continued shift from a set of broadly export-reliant markets to one driven by domestic consumption and investment should also help provide continued growth and offset slowdowns in the US and European economies. We look for stocks that can capitalise on this domestic growth story, and companies with strong pricing power. These will be best placed to provide good earnings over the next 12 months.

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

We began focusing on domestic-oriented themes and sectors over 12 months ago, and we continue to believe this is the right strategy to purse in Asian markets.

Towards the end of last year we also began to consider factors that we believed would become important in an environment of higher volatility. These included deleveraging and the effective use of cash flows, as reflected in higher ROE and rising dividend payouts. These quality factors are often overlooked in a growth-driven market, but we believe they will become key considerations for investors. Our Quality-focused dividend strategies have demonstrated this to be the case, outperforming the broader benchmark by over 7.5% YTD.

What are your favoured markets in Asia?

We prefer the North Asian markets in general. Oil prices are still unpredictable, and are a major inflationary factor for Southeast Asia. As a result, these countries are facing greater pressure to tighten monetary policy and restrict growth. In North Asia, we believe Taiwan will benefit from improving cross-strait ties and the governmentÆs strong domestic spending policies.

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

Our investment philosophy is based on a bottom-up approach to stock picking. While certain countries may face greater challenges than others in the upcoming year, we would always look at individual opportunities in each market.

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

We like sectors that will benefit from domestic growth consumption, such as consumer staples. We also like sectors that benefit from government spending, such as infrastructure.

Given the uncertainty in the global business environment, we focus on companies with strong cash flow characteristics and defensive earnings streams such as selective telecoms.

Sectors that are less correlated with the global business cycle, such as utilities, can be attractive, providing these are vertically integrated and able to pass on higher input costs.

Which sectors do you expect to underperform?

We are underweight sectors such as technology and industrials, where the earnings risk is high at this point in the global cycle.

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

The credit crisis, a global slowdown emanating from the US and Europe, and inflation in emerging markets are major challenges. Asian central banks face difficult and contradictory pressures of inflation and the risk of slowing growth. Company margins will be squeezed. The challenge for us is to find companies with strong pricing power and good earnings visibility who will be able to succeed in this environment.