Asia Pacific and Japan All Cap

Within a matter of days, however, a fall in the US dollar and the threat of a rout in the US government bond market encouraged the president to impose a 90-day pause on introducing many of his tariffs. As the world pulled back from an outright trade war, Asian markets rallied, with the gains being led by markets in the export-dominated economies of South Korea and Taiwan. Given our enthusiasm for a number of India’s high-quality, entrepreneurial companies, we were pleased to see share prices in that country starting to rally off the lows seen earlier in the year. The rally was aided by a cut in interest rates but also, we would argue, by valuations that appear attractive in view of those companies’ long-term growth potential.

Although share prices in some parts of Asia have recovered from the falls seen at the start of the quarter, the on/off discussions on tariffs have undoubtedly created lingering uncertainty. Some of the companies we have met are looking ahead to a potential resumption of talks on trade. Although we won’t try to predict their outcome, we would note that business leaders are often preparing for the worst while hoping for the best. While the market waits for greater clarity on trade, we continue as usual: seeking high-quality companies to invest in for the long term.

We added three new holdings over the quarter. Trip.com (China: Consumer Discretionary), a leading online travel agency, is set to benefit from the growth in the number of Chinese tourists travelling both domestically and overseas. Similar companies in the US and Europe have shown how attractive the economics of online travel platforms can be and have shown the tendency for market leaders in this industry to dominate their smaller rivals over time. Sea (Singapore: Communication Services) is the parent company of the Southeast Asian e-commerce retailer Shoppee. It has built a strong presence across the region by offering attractive prices, a wide selection and reliable delivery. We expect it to benefit from the growth of e-commerce across the region, from its expansion into the Brazilian market and by offering credit to Shoppee’s users and merchants. Motilal Oswal Financial Services (India: Financials) offers stockbroking, asset management, wealth management, investment banking, and housing finance. It is led by an ambitious-but-conservative steward and should benefit from meeting the savings and investment needs of India’s growing middle class.

Perhaps of greater significance was that political turbulence resulted in some wide differences in returns on a country level. Market indices in China, South Korea and Singapore moved higher but fell across the rest of the region, with some markets suffering steep falls.

Most notable was the contrast in returns between India (which was down) and China (which was up). Investors’ enthusiasm for Chinese equities was, in part, a response to artificial intelligence (AI) company DeepSeek’s impressive demonstration of the progress the country is making in AI. And while there was less news from India, share prices fell back from high levels, as they did in many other parts of the world. Returns from the Indian market over the quarter were broadly in-line with those from the United States (US).

During the quarter, we bought S.F. Holding (China: Industrials), Mindray (China: Health Care) and Alibaba (China: Consumer Discretionary). We believe each of these companies has the potential to benefit from China’s increased emphasis on national self-reliance (producing more of its own goods and services and reducing imports). Over the last five years, the leaders of Chinese companies have, often for the first time, been tested by genuine economic and political instability. They have learned valuable lessons and many have become financially stronger, reducing their reliance on borrowing. This, in combination with valuations that appear modest by global standards, means we have been identifying a greater number of new investment ideas in China.

Elsewhere, we added a new holding in Ayala (Philippines: Industrials), a family-owned business group whose new management is focused on improving returns. In India, we added new holdings in Triveni Turbines (India: Industrials), a leading manufacturer of steam turbines and Bajaj Auto (India: Consumer Discretionary), a leading manufacturer of motorcycles, scooters and auto rickshaws. 

Many Chinese stocks lost some of the performance gains that they saw in the third quarter of 2024 when the government announced positive economic events. The performance of the Indian market index struggled after some of the largest companies in India faced governance issues that became subject to enquiry by the regulator in the United States. The re-election of Mr Trump in the United States election in November also seemed to distract global investors from Asian equities. At Stewart Investors we continue to concentrate on companies rather than unpredictable economic and political news.

During the quarter we bought DFI Retail Group (Hong Kong: Consumer Staples), a pan-Asian retailer led and stewarded by the Keswick family. We also bought Naver (South Korea: Communication Services), South Korea’s dominant internet search engine which has significantly improved how it allocates and spends its financial resources in recent years.

We also took advantage of attractive valuations to increase the size of our positions in AirTAC International (Taiwan: Industrials), Yiheda Automation (China: Industrials), Techtronic (Hong Kong: Industrials), Sysmex (Japan: Health Care), MANI (Japan: Health Care) and AS ONE (Japan: Health Care).

Due to lower confidence, high valuations, or finding better ideas elsewhere, we sold Pentamaster (Malaysia: Information Technology), Advanced Energy Solution (Taiwan: Industrials) and Samsung C&T (South Korea: Industrials).

To control position sizes, we trimmed our holdings in Mahindra & Mahindra (India: Consumer Discretionary), CG Power (India: Industrials), CSL (Australia: Health Care), HDFC Bank (India: Financials), Syngene (India: Health Care) and Fisher & Paykel Healthcare (New Zealand: Health Care).

During the last few days of the quarter the Chinese central bank and government announced changes to public spending and taxation rates to boost the economy. This caused Chinese stocks to rise significantly. Whilst it is heartening to see the Chinese authorities attempting to address the problems within the economy it remains unclear whether the changes will adequately address broader issues like the lack of consumer demand.

We bought Yiheda Automation (China: Industrials), China’s leading supplier of factory automation components. Yiheda has a business model that we have seen create large, profitable companies elsewhere in the world. Due to the high level of resources and investments required for these types of businesses, as well as the close relationships they form with customers, the early leaders tend to be in a strong position and newer companies can find it difficult to catch up. Yiheda are currently affected by falling industrial demand but in the long run they have the opportunity to consolidate a growing market that is still largely dominated by small family-run businesses.

During the quarter we added to Aavas Financiers (India: Financials). We also took advantage of lower valuations in businesses exposed to China to add to AirTAC International (Taiwan: Industrials) and Inovance (China: Industrials).

We sold RBL Bank (India: Financials) and Hamamatsu Photonics (Japan: Information Technology), both of which were smaller positions where our confidence had lowered over time. We also sold Kotak Mahindra Bank (India: Financials) to fund better ideas elsewhere.

We controlled the position size by trimming our large holding in Mahindra & Mahindra (India: Consumer Discretionary), and also trimmed Fisher & Paykel Healthcare (New Zealand: Health Care) and Unicharm (Japan: Consumer Staples).