Andrew Fay is the Australian-based Asia Pacific CIO of Deutsche Asset Management and here gives his views on how the region will perform in 2004.

What are the main drivers of growth of Asia's markets this year?

On the macro side, the United States will be the driving force. I see a snychronised recovery around the world, as the huge liquidity that has been pumped into the system will start to buy into financial assets. We expect to continue to see an upgrading of the growth outlook that we have already seen in the United States, India and China.

However, it will not be all plain sailing. For Asia in particular we have elections in Taiwan, Korea, Singapore, Indonesia and Malaysia. Those elections and their results are going to impact how foreign investors look at Asian markets.

Overlaying this is the whole terrorism concern. Areas where this is more of a threat will be discounted from a financial markets point of view.

Are we going to see a recovery in Japan?

It has had about12 or 13 years of bear markets and slow growth. Like Hong Kong, we are seeing that the deflationary pressures are now easing. There has been a rebound in sentiment, consumers are starting to spend and Japan seems to be in a cyclical recovery phase. We see this picking up going forward. It is one of our overweight markets.

Which industry sectors do you like in Japan?

We like some of the bank restructuring stories. We are also finding value on the technology side, especially in the digital camera area.

How about in Asia-ex Japan, are there any industry sectors you tend to favour?

Since consumer stocks are hard to find, we tend to use financial stocks in Asia ex-Japan to tap into the improving consumer demand story. We are also interested in the material sector, as there is growing production and trade both with the United States and within the region.

What do you think of India's prospects?

We are very excited about India. We have recently launched a new fund, raising $500 million there, largely from high net worth individuals. We are encouraged by the maturity of the marketplace and the strong emergence of a middle class. We expect to see domestic spending picking up in India, reflecting in high consumer credit card growth rates next year.

Are you overweight in India?

Yes. We don't see it as being overly-expensive even though it has had a fairly good run. We are interested in the banking sectors, the agricultural side and the service sectors as well.

We see a lot of things aligning in India at the moment and are looking forward to a good period of growth. Obviously we are watching the political situation with the elections coming up.

What do you think of China as an investment prospect?

We are overweight China. The market is very sceptical about the sustainability of its economic strength, but next year we are predicting an annualized growth rate of about 8% in China. From a valuation point of view, stocks are still reasonable.

How about the Southeast Asian markets? Are you interested in Indonesia?

We like Indonesia. It is probably the most politically unstable, but the valuations are cheap. The low interest rates there are feeding through to the real economy with loan growth and capex spending improving. We are marginally overweight here but if the political situation settles down we would consider it more closely.

How about Malaysia?

We are neutral there. Although the political situation looks okay there is a lack of stock ideas.

And Thailand? Can the market continue its gains into next year?

Market gains certainly make investors nervous, and if overseas investors look at this region with the elections and terrorist threat they could be put off. But we are more likely to add to our weightings in Thailand. We view the markets as being relatively cheap, and earnings growth is on track.

There have been proactive proposals to curb the retail and property speculation. These have some chance of being repealed, and if this does happen there will be some positives on the back of that.

How would you sum up your outlook for Asia this year?

We are overweight in Japan, Indonesia, China and India. We have smaller positions in Thailand and Taiwan. We are underweight in Hong Kong and Singapore.

The surprise packet could be Korea. They could do better than the market is giving them credit for, if they get through the credit card problems and the elections. What we don't want to see is any more corporate governance issues.

Although we predict a high economic growth rate for Korea in 2004, what we need to see is a clear revival of domestic consumption in order to get us excited.

FinanceAsia is running a competition to predict the level of our Asian blue chip index The FinanceAsia 100 and a case of champagne will be awarded to the entrant that comes closest to predicting the level on December 17. If anyone predicts the number exactly, they will win an iPod music player. The current level of the index is 1220 and entries should be made as round numbers to [email protected]