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

Manish Bhatia is the Hong Kong-based head of Asia-Pacific equities at MFC Global Investment Management, the asset management division of Manulife Financial. He is responsible for managing all equity investments in the Asia-Pacific region and works closely with ManulifeÆs investment team in Hong Kong. He is responsible for around $900 million in assets in Asia-Pacific ex-Japan markets.

MFC Global manages around $250 billion worldwide. Out of that amount, around $55 billion is in equities, including $5 billion in Asia.

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?

Bhatia: Asian markets have been weak and volatile for most of the current year. Conventional wisdom suggests that Asian economies and markets are vulnerable to any weakness in global economic growth. Liquidity is receding from equity markets in anticipation of such external growth weakness. However, we expect this cycle to pan-out differently from past historical trends. There are structural elements in the consumption and investment trends in Asia which will provide resilience to the Asian economic zone. Additionally, the balance sheet for most Asian countries in terms of external account balances, fiscal situation, overall leverage, is healthy. We therefore view the current stock market weakness as a buying opportunity.

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

Since the beginning of the year inflation has surprised on the upside. Inflation in addition to cutting into consumption and corporate profitability also impacts long-term valuation levels. It is because of this factor that we have become a bit more cautious on the near term outlook for the market.

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

We have turned more cautious on sectors that are witnessing cost escalation in one or more of their inputs. An example would be shipbuilders which are likely to be hurt by a significant rise in steel prices.

What are your favoured markets in Asia?

We like Taiwan due to its attractive valuation and dividend yield. Taiwan has shown encouraging capital management and as a result exceptionally good shareholder orientation. Capital reduction, rising dividends, buybacks û all point to a changing attitude of Taiwan corporate sector and augurs well for the long term re-rating of the market. Policy framework is also undergoing subtle change by providing greater latitude to the corporate sector in terms of pursuing business expansion and growth strategies in China.

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

We are cautious on the Indian market. India is facing severe macroeconomic headwinds. Higher oil prices have exacerbated its trade and fiscal deficits and have resulted in a weaker currency and higher interest rates. Domestic economic slowdown looks inevitable now. Markets still trade at relatively high valuation levels.

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

We essentially follow a bottom-up stock selection investment style with broadly country-neutral portfolios. We have marginal over-weights in Taiwan, Thailand and Singapore offset by underweight in Korea.

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

Inflation related concerns have hurt some of the interest rate sensitive sectors. Higher commodity prices are resulting in demand destruction and a new equilibrium is likely to be established at lower price level. It is therefore likely that inflationary concerns are likely to abate from here. Therefore, on a 12 month view, interest rate sectors such as property and consumer discretionary are likely to do well.

Which sectors do you expect to underperform?

Petrochemicals and refining, due to sizeable capacity additions in the Middle East, China and India. Iron ore, due to a significant upcoming supply increase.

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

The uncertainty over the depth of a US economic slowdown and the US dollar weakness and its impact on commodity prices in particular for oil. Asian economic growth will moderate if the US undergoes a protracted and serious growth slowdown and oil prices remain at elevated levels.

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

Policy risk is emerging as the biggest uncertainty of investing in Asia. Several countries are responding to inflation by imposing price and export controls û measures that are not viewed favourably by stock markets. We are avoiding such sectors which could have high policy sensitivity.