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

Wilfred Sit is the Hong Kong-based CIO at Mirae Asset Global Investments. He leads the Asia-Pacific ex-Japan team of portfolio managers and analysts in Hong Kong and Singapore. He manages regional sector funds as well as various China mandates. He is also responsible for overseeing the sector funds run by the regional sector analysts, and is a core member of the regional strategy and asset allocation team. His Asia-Pacific team manages more than $14 billion in assets.

Mirae Asset Financial GroupÆs asset management arms manage around $66 billion in assets.

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?

Sit: I see the biggest opportunities in China in the coming 12 months. The China market has fallen significantly since the correction started in November and valuation has come to a reasonable level. There could be some more downside but I believe there will be opportunities for investors to get in within the next three to six months.

Economic growth and earnings growth would moderate from previous yearÆs levels, but would remain high when compared to other global markets. The country enjoys fiscal surplus and current surplus, which helps it to cushion the oil shock better than other Asian countries. The domestic economy is growing by the day, which provides ample opportunities for investors. I would focus on domestic demand related sectors such as infrastructure and consumer, as well as inflation victims such as petrochemical and power plants as I believe inflation will trend down in China.

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

The core focus remains the same: domestic demand related sectors in Asia, as well as selective commodities. The only difference is that at the beginning of the year I had more interest rate-sensitive stocks such as properties which benefit from negative real interest rates in certain countries, but now I do not own them as inflation has been higher than expected hurting economic growth in Asia. This has dampened the sentiment in the property market, although real rates remain negative.

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

I have been reducing my exposure to India and adding to Australia. For the former, it was hard hit by inflation and high oil prices, and it suffered from current account deficit, so the currency is also at risk. For the latter, I have increased the weighting for exposure in both soft and hard commodities, which are still on an uptrend. I have also been gradually adding to China as the market corrects.

What are your favoured markets in Asia?

At this point, it is Taiwan given that we could see further re-rating on the market with an improved cross-strait relationship. Looking forward, however, China is likely to become our most favourite market within Asia again.

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

Within Asia, I would be underweight in markets that have a current deficit as they would be most exposed to higher energy and commodity prices, such as India and Korea.

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

Financials could outperform looking into next 12 months as they are trading at low valuations, dragged by global de-rating of financial stocks, while in Asia their exposure to US subprime instruments is very limited.

Looking into more niche sectors, the alternative energy sector could outperform as it benefits from high energy costs, increasing investments, as well as government initiatives.

Which sectors do you expect to underperform?

The manufacturing sector which suffers from export slowdown and rising raw material costs.

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

Higher raw material costs will eat into the margins of a lot of businesses, so the challenge is for investors to identify companies with strong pricing power that can pass on these higher costs to their customers. The quality of management is seriously being tested in this kind of difficult environment. Companies cannot simply rely on volume growth to grow their business; they have to focus on margin management to grow profits.

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

High inflation û energy costs and food costs û would raise political risks across Asia. I focus on markets which are less hit by inflation, and which have a more stable political system, or a country that is less likely to suffer political turmoil.