Ayaz Ebrahim is the director & CIO Asia Pacific, HSBC Asset Management, and after seeing many of his country funds have stellar performance in 2003 (China fund up 105.6%, India fund up 117.1%, Thai fund up 170.8%), offers his views of markets in 2004.

What is going to be your main focus in Asia in 2004?

Ebrahim: Going into 2004, I think there'll be more of a domestic theme going across Asia. Last year, a significant part of the equity strength was on the back of the Asian export story and the recovering US economy. This should flow into the domestic economy in 2004 in terms of growing consumer confidence.

Also, a continuing low interest rate environment and weak US dollar should bode well for domestic consumption.

Next year should also see the return of more normalized returns. This year has seen the MSCI index up some 30%. This is not something investors should be expecting on a regular basis.

Will China continue to achieve the high growth rates we have seen in 2003? Are there any risks to this?

We think China will still continue to grow at fairly strong rates. At this point, there is sufficient capacity in the Chinese economy for this not to lead to any major structural concerns.

To drive this growth, strong FDI inflows are key. The continued capital market reform is important as well, as it encourages these investment flows. The Chinese authorities seem to be doing a good job at the moment.

The largest risk to the China story is the bad loans in the banking system. These are not being caused by strong growth, but hopefully strong growth and government policies can address them going forward.

Do you see the A-share market as being a lucrative one for 2004?

I think the A-share market will perform positively for investors. But you have to be selective and look at the companies from a bottom-up approach. The A-share market is a stock picker's market as there is a very wide choice of companies.

There are still valuation issues on A shares compared to H-shares.

Going forward the A-share market has a lot of room to continue to expand as listings on the market grow.

How does the India equity story compare to China's?

If you look at valuations and growth rates, I think the Indian story looks compelling as well. The private sector has continued to make great strides. Admittedly, if you compare public sectors it is obvious that India has not matched China in terms of infrastructure spending. As some Indian politicians have commented, perhaps the growth that you see in India compared to China is 'the price of democracy'.

Within the Indian private sector, which industries look interesting?

The tech story will certainly continue to be good. Last year we saw a big improvement in tech share prices from what, one can argue, were very oversold situations. We are now seeing a pick-up in demand which Indian companies are benefiting from.

With the election coming up in Taiwan, do you think the market there will perform well?

Taiwan could be interesting. Certainly with the elections coming up, there will be fiscal and monetary stimulus to help the economy. But, with the continuing political rhetoric with China, market performance may be volatile. We'll have to wait and see how this pans out.

The MSCI re-weighting of Taiwan should come into play at some stage. This will be fairly significant. The announcement itself will not cause markets to jump huge amounts, but it does mean you've got a constant flow going into Taiwan which will give the market a certain floor, bar any really negative issues vis-à-vis the economy.

On the domestic side we believe things are starting to recover and should get better.

Will we also see a strong domestic story from Korea?

Last year, Korea was a bit of a mixed bag. The export story has done very well, but the domestic growth has been slack.

We are more confident on the domestic side for Taiwan than Korea. Logic says that we should see the same domestic consumption boost in Korea. Improvements on the credit card side, a stronger currency and easy interest rates should also feed into a better domestic consumption story.

But the political side is a bit of a question mark and is dampening consumer confidence and causing policy hiatus.

Are investors becoming more comfortable with Indonesia and the Philippines?

Not really. There are a few problems over there. Apart from the domestic political issues, the equity markets are just too small at the moment. One may argue that Thailand had also become very small, and in the scheme of things, Thailand is still not huge, but it's a bit more meaningful than the Philippines and Indonesia.

From your bottom-up company analysis, do you see any industry sector bias emerging?

There is certainly going to be more of a domestic demand theme. Therefore the stock picks include banking, consumer products and possibly infrastructure in certain countries.

Do you see yourself increasing your allocation to Asia within your global portfolio?

At the moment we are overweight in Asia anyway. To move it any higher is unlikely. But, of course that does not take into account possible new inflows of money.

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]