Asia Pacific All Cap

The second largest contributor was Taiwan Semiconductor Manufacturing (TSMC), the leading semiconductor foundry, as recent earnings results were stronger than expected. With AI demand driving higher profits and strong guidance for the year ahead, the company announced new capital expenditure plans to try and narrow the gap between its supply of advanced nodes and customer demand.

The third largest contributor to performance was Chroma ATE, a leading Taiwan-based supplier of testing equipment for semiconductors, power generation and electric-vehicle batteries, among other applications. The company's full-year 2025 earnings beat analyst expectations, showing a sharp increase in profits. This was largely thanks to Chroma's leading position in semiconductor testing and the production of power-testing equipment for AI data centres, which means it is a key beneficiary of the Big Tech capex cycle. The market has also welcomed its move into new areas such as co-packaged optics (CPO), a next-generation technology for connecting chips using light rather than copper wires.

On the negative side, Tencent, the biggest social media network and online gaming company in China, declined after the company announced it would reduce its share buybacks to support accelerated investment in AI. We recently met the company to discuss its AI strategy, and came away with our conviction strengthened. Tencent has been hiring experts in the field and is developing an in-house LLM. Over the longer term, we believe Tencent should benefit from AI thanks to its unique advantages: a massive user base across WeChat, games and payments; rich first-party data; and integrated advertising and content systems.  We have been using the recent weakness to build up a meaningful position in the company.

The second largest detractor from performance was HDFC Bank, as the bank continued to face a challenging operating environment and improvement in net interest margin has been slower than expected. The resignation of the chairman also led to concerns. However, we have spoken with the management and joined a call with the new interim chairman Keki Mistry, who we respect. We feel comfortable about the governance and the quality of its franchise – in particular, its deposit franchise and underwriting culture/capability remain solid and a standout amongst banks. Valuations have declined to levels not seen before, even during the Global Financial Crisis or the Covid-19 pandemic, and we find this to be very attractive, given HDFC’s leading deposit franchise and pristine balance sheet. We believe returns can improve and book value can compound at a mid-teens rate which is attractive in absolute terms

The third largest detractor was Trip.com, China's dominant online travel platform, with around 70% market share. The company fell sharply in January following news of an anti-monopoly investigation by Chinese regulators (the company is cooperating fully with the investigation). This was compounded by investor fears that large language models (LLMs) could disrupt its business. However, the company’s proven track record in handling the real-world complexities of payments, cancellations and customer service, not to mention relationships with hundreds of thousands of hotels and other travel providers, give it key competitive advantages. Recent earnings results have been positive, and we expect Trip.com to benefit from continued travel demand in China.

New purchases over the quarter

XCMG Construction Machinery is a leading construction equipment maker with market-leading positions across its comprehensive product portfolio. Due to legacy state ownership, lack of alignment and core businesses being kept outside of the ListCo, XMCG had not performed well in the past, but the recent mixed shareholding reforms (in 2022) provided a positive catalyst for change. XCMG has introduced an employee share ownership plan (ESOP) and is focused on improving its operational efficiency and shareholder returns. We believe XCMG can become a much stronger company in time, which could drive meaningful earnings growth.

Fuyao Glass is a leading auto-glass maker with a large and growing export business. The company is an industry leader, with a strong competitive moat and track record. As automobiles turn into “intelligent mobile terminals”, technology is being integrated into auto-glass – such as car windscreens with futuristic heads-up displays, panoramic skylight glass, and coated glass to block the harmful effects of ultraviolet and infrared radiation. Fuyao’s products are lighter, more durable and more energy-efficient than peers, which puts it in a good position to win contracts from global car manufacturers and continue to increase its share of content per car. While a slowdown in EV sales is a key risk, we believe Fuyao’s current valuation is attractive and offers decent risk/reward.

Complete sales over the quarter

We continued to sell out of expensive holdings in India where the risk/reward looks poor compared to other, more compelling opportunities. Complete sales over the quarter included Info Edge, a leading recruitment and real estate classifieds platform; and Marico, a leading consumer business with a dominant share in branded coconut oil.

While both companies have attractive franchises with decent growth prospects and are helmed by management teams we like and respect, we would want to own them at cheaper valuations. We believe an important contributor to returns over the longer term is to stay disciplined on valuations.

We also sold out of Tata Consultancy Services (TCS) and Tech Mahindra, as the changing face of technology is leading to headwinds for IT services companies in general. This has led to revenue deflation, which makes it even harder for large companies to adjust. The valuation was not cheap, factoring in these concerns, and the risk/reward did not seem favourable.

Looking forward

We remain optimistic on the outlook for Asian equities. While the Middle East conflict, and its impact on energy prices, will likely result in elevated short-term market volatility, our quality bias means that our holdings should remain fundamentally resilient. Although Asia is heavily dependent on the Middle East for its energy needs, the emerging markets universe has historically operated in a more inflationary and volatile environment, and we have taken this into consideration in our stock selection.

In the long run, we believe Asia should continue to benefit from the shift towards higher value services-led growth, digital transformation and the ongoing financialisation across the region. Valuations look attractive in comparison to developed markets like the US, while low ownership of Asian equities in global portfolios provides a good backdrop for absolute returns as global liquidity flows eastwards.

As markets start to broaden from their narrow focus on AI, we believe quality businesses owned in the portfolio should do well. We have invested in companies with high-quality management who think long term and counter-cyclically, operating in industries with deep moats that support predictable and strong returns on capital. They are running businesses with solid pricing power due to strong brands, high switching costs, or strong network effects, and with conservative balance sheets where cash exceeds debt. We are confident that their strong fundamentals will translate into attractive shareholder returns in the long run.

Latest insights from the FSSA team

We have written short articles on companies, investment trends and market themes across our various strategies, which are available to read on the FSSA website.

Our latest piece “Against the current” discusses the reasons why high-quality companies are being overlooked amid the artificial intelligence boom and resurgence in cyclical stocks. FOMO is beating fundamentals; but these trends are creating opportunities for quality-focused investors in Asia and emerging markets to accumulate attractive businesses at lower valuations. 

Martin Lau is one of the Managing Partners of FSSA Investment Managers. He has been with the team for more than 23 years (since 2002) and worked closely with members of the SI team before the 2015 reorganisation. He is a well-known and experienced investor and is lead manager of a number of FSSA strategies, including FSSA Asian Equity Plus, FSSA Asia Focus, FSSA China Growth and FSSA Hong Kong Growth. Martin has more than 30 years of investment experience and is based in Hong Kong.  

Sree and Martin are supported by a broader team of investment analysts, with an average of 14 years of investment experience and 8 years tenure with the team. All 15 members of the FSSA investment team are analysts first and foremost, including the portfolio managers, and we spend the majority of our time meeting companies, writing research and seeking quality companies to invest in. 

How we invest

FSSA’s investment philosophy, which shares its genesis with SI, has remained broadly unchanged since the First State Stewart team was established in 1988. We focus on identifying quality companies, buying them at a sensible price and holding them for the long term. Most importantly, we invest our clients’ capital as if it were our own. As long-term investors and owners of businesses on behalf of our clients, we look for founders and management teams that act with integrity and risk awareness, and dominant franchises that have the ability to deliver sustainable and predictable returns over the long term.  

As a team, we conduct over 1,000 direct company meetings each year across Asia and other emerging markets. The most significant source of investment ideas comes from these company visits and country research trips. We find that our reputation as patient, long-term investors has given us unparalleled access to management, which allows us to gain valuable insights and a thorough understanding of the businesses we want to invest in. 

As a result of our long-term time horizon and conservative investment approach, our portfolios – and our performance – can look very different to the index. We shy away from “flavour of the month” themes (such as the current AI-driven boom), and instead look for high-quality companies that can deliver attractive returns for much longer than the market expects – and extend our investment time horizon to capture that advantage. When you own quality businesses, time isn’t a risk – it’s an asset. 

Our performance may lag in very buoyant or momentum-driven markets, but we usually compensate very quickly once such bubbles burst. Based on historical data, our long-term track record shows that our portfolios tend to perform better in “normal” markets (-15% to +15% returns over one) and bear markets (more than 15% decline), than in steeply rising markets (defined as over 15% returns over one). 

A smooth transition 

Given the significant overlap in SI’s and FSSA’s investment philosophy and portfolios, we know all the holdings well. As part of the transition, we made a few changes to tilt the portfolio towards companies with stronger cash generation, higher returns and better long-term growth prospects. In general, we are adding to holdings in China, where we have found leading businesses like Tencent, with strong competitive advantages and attractive growth at reasonable valuations. We are reducing exposure to India, mainly in cyclical businesses like Tube Investments of India and Motilal Oswal, where valuations are expensive and the growth outlook has deteriorated.  

Below, we highlight a few of the key additions and disposals over the fourth quarter of 2025.  

New purchases: 

Tencent Holdings is the largest social media network and online gaming company in China, with growing businesses in online advertising, cloud services, e-payments/e-commerce and overseas gaming. Tencent has created an ecosystem of businesses which are unrivalled and should continue growing over the medium term. It has continued to develop new functions within WeChat (such as Video Accounts and Mini Shops), which should slowly improve monetisation and enhance the quality of the franchise. At FSSA, we have been shareholders of Tencent since 2005 and have consistently found the management to be effective long-term stewards of the business. In recent times, we have been impressed by Tencent’s AI strategy and its disciplined approach to technology investments, which aligns with our conservative view on AI capex spending. 

Realtek is an integrated circuits (IC) design company based in Taiwan which focuses on connectivity solutions such as WiFi, Ethernet and Bluetooth. While wireless technology is relatively mature and seemingly commoditised, there does seem to be some differentiation between providers. With rising competition from Chinese chip designers who often undercut on price, Realtek is focusing more on value-added products and has targeted applications with higher tech requirements, such as Edge-AI devices and AI glasses. We are optimistic that Realtek will be able to fend off the competition with higher barriers to entry as it moves up the value chain, and that margins should improve due to the product mix. The company has a long history and good track record and should benefit from the broadening use of AI in on-device AI agents. 

Kotak Mahindra Bank (KMB) is one of India’s leading financial services companies – it has consistently improved the strength of its deposit franchise and maintained better asset quality than peers through the business cycle. While the founder, Uday Kotak, has stepped down from his managing director/CEO role due to the central bank’s limits on leadership terms, he remains closely involved as a board director and should ensure that the bank’s risk awareness and long-term thinking is maintained. Meanwhile, the new CEO (Ashok Vaswani) aspires to grow the business further by focusing on consumer banking and digitisation. We expect to see a growing trend of formalised financial savings, benefiting KMB’s insurance, mutual funds and asset management businesses. 

Complete sales: 

Samsung Biologics is a leading contract manufacturing organisation (CMO) in biologics. An impressive franchise that grows strongly (25%+ p.a.) at high margins (40% operating margins), but it is fundamentally capital-intensive and somewhat commoditised. We sold on concerns about rich valuations and its large market capitalisation. 

Motilal Oswal Financial Services is a non-bank financial company (NBFC) in India. We sold out of a lower conviction holding to raise cash for better ideas elsewhere. 

Glodon is a leading construction software vendor in China. We have known the company for many years. The challenges related to the property sector mean that the growth outlook is unattractive. Based on the current near-term weakness, we believe the valuation does not adequately account for the risks. 

Performance and outlook

With our long-term investment time horizon, we tend not to pay much attention to short-term market fluctuations. We invest on at least a three-to-five-year view, though we often hold on to companies for much longer. In an industry rife with short-termism, we believe our long-term approach stands out from the crowd. 

What we have seen, over the past few decades, is that average holding periods for stocks have fallen from over eight years in the 1960s to less than six months today.  Yet this shift has come at a cost: it reduces investors’ ability to generate outsized returns that are materially different from the broader market. The reason is simple — as investment horizons shrink, so does the return dispersion between the best- and worst-performing companies. With less time in the market, investors end up tracking the index, not beating it. 

Emerging Markets: time horizons matter

MSCI EM Index -dispersion around mean return for top 10% top / bottom stock performers

Our clients have understandably been keen to discuss the changes that have taken place within our business. Set against that, however, we have been careful to ensure that the majority of our time and attention remains on companies. As part of this, we have been discussing the broader forces being felt by companies across the Asia Pacific region, particularly the extraordinary surge of investment in AI. Although AI is often viewed as a US-focused phenomenon, many of its leaders are actually found in Asia rather than America. They include the manufacturers of the advanced semiconductors that supply computing power to data centres, the companies whose technology tests those semiconductors for reliability, and the suppliers of essential components to data centres.

We are aware of the intense geopolitical pressures that surround some of these companies, such as the desire to shift production of semiconductors back to the US to keep the most advanced chips out of the hands of America’s perceived enemies. These pressures may influence corporate behaviour in a way that is not to the advantage of long-term shareholders. This is something we are debating and watching closely. To deepen their understanding of this subject, two members of our team recently visited South Korea, which, along with Taiwan, is at the heart of the global semiconductor industry.

The number of companies entering and leaving the portfolio remained typically low. As we describe below, we added three new holdings while selling five.

Activity

New holding: AIA (Hong Kong: Financials)

Over the course of more than a century, the life insurer AIA has steadily developed a distinct culture combining a conservative approach to investment with an entrepreneurial structure. Its business is built around a high-quality salesforce who foster long-term relationships with their customers. AIA demands higher levels of professionalisation from its agents than many of its competitors, who often rely on armies of part-time agents. Although this means there have been times when AIA has grown more slowly than its peers, putting the needs of its customers above drive for short-term expansion has enabled it to build a premium brand. It now has an opportunity to grow by fulfilling unmet insurance needs across China, India and Southeast Asia. While those countries are getting richer, they lack social safety nets, making insurance products a necessity. This is especially true in China, where the regulator has recently allowed AIA to expand into new regions beyond its historical areas of strength in Beijing, Shanghai, and the Pearl River Delta.

New holding: Jardine Matheson (Hong Kong: Industrials)

Jardine Matheson is a complicated company whose journey towards greater simplicity and professionalisation has the potential to reward patient investors. The current chairman inherited a sprawling conglomerate whose interests span retail, property, financial services, healthcare, autos, construction equipment, hotels, and mining. His vision is to appoint high-quality professionals to run the company’s various business units, giving them well-defined targets and then granting them autonomy to hit those targets. He keeps a deliberately low profile and acknowledges the missteps the business has made over the past decade. Both are valuable signals of humility. He has sold a number of businesses not viewed as being central to the company’s long-term growth story in a way that would have previously been unthinkable.

New holding: Singtel (Singapore: Communication Services)

Singtel has significant shareholdings in various telecoms businesses across Asia, including the Philippines, Indonesia, India, Thailand, and Australia. Telecoms companies tend not to grow quickly but they do deliver cash to their shareholders through dividend payments in a steady and predictable manner. That its share price looks low relative to its underlying profits suggests that it remains deeply out of favour among investors despite the fact that, under the leadership of Kuan Moon Yeun, we believe it is better managed than it has been for some time. Since 2021, he has brought more focus to the company by selling off businesses in areas such as digital marketing and online advertising that had been bought by the previous management team.

Sold: Dabur (India: Consumer Staples)

Dabur directly contributes to improving the health and wellbeing of the Indian population by selling herbal and Ayurvedic products covering hair care, oral care, skin care, home care, food and beverages. While it remains a high-quality company, its share price no longer left any room for disappointment.

Sold: Mainfreight (New Zealand: Industrials)

Mainfreight is a logistics company in New Zealand. While it is well managed and has a first-rate culture, we now have stronger ideas elsewhere.

Sold: Tata Communications (India: Communication Services)

Tata Communications is in the midst of a transformation, evolving from a utility company into a technology business partner, offering a range of digital services and solutions to its clients. While profitable, this is also a highly competitive area and our confidence in its future growth has weakened. We can now find stronger ideas elsewhere.

Sold: Tokyo Electron (Japan: Information Technology)

Tokyo Electron sells manufacturing equipment to semiconductor makers such as Samsung Electronics and TSMC. We had become concerned that its share price was too high.

Sold: Zhejiang Supor (China: Consumer Discretionary)

Concerns that a variety of challenges, including weakness in China’s housing market, would overpower satisfying, long-term returns motivated the sale of Zhejiang Supor, a cookware manufacturer with limited growth prospects. 

Motilal Oswal Financial Services (India: Financials) businesses include stockbroking, asset management, wealth management, investment banking, and housing finance. This should position it to grow through meeting the savings and investment needs of India’s growing middle class. ICICI Lombard (India: Financials) is an insurer that should benefit from Prime Minister Modi’s commitment to delivering ‘insurance for all’ by 2047. Lastly, we added SM Investments (Philippines, Industrials) a business group whose activities span property, banking, and retail which is also venturing into new areas such as logistics and geothermal energy.

To fund these purchases, we sold Hangzhou Robam (China: Consumer Discretionary), Bajaj Housing Finance (India: Financials) and Dr. Lal PathLabs (India: Health Care). We also sold Unicharm (Japan: Consumer Staples) due to concerns over its growth prospects.

We estimate that, of the holdings in our Asian portfolios, roughly three-quarters are primarily focused on selling to their domestic markets, offering them a useful buffer amid ongoing concerns about potential disruptions to international trade. With valuations across Asia currently standing at what we regard as extremely attractive levels, we remain confident in the prospects for returns from our carefully selected high-quality companies.

1 Source: Straits Times, 21 December 2023 ‘China is world’s second-largest economy but its passport is ranked 63rd. Are things looking up?’.