Global Emerging Markets All Cap

Performance review

The largest contributor to performance over the period was Samsung Electronics, a leading manufacturer of memory and semiconductor chips. The company posted record profits thanks to soaring artificial intelligence (AI)-related demand and tight supply for its high-bandwidth memory (HBM) chips. Samsung started shipping its next-generation HBM4 chip in February – having reportedly agreed higher prices compared with the previous model – positioning the company to capture a larger share of fast‑growing AI server demand. On the other hand, high legacy memory (DRAM and NAND) prices look less sustainable in the medium-term as it is already causing demand destruction in consumer electronics products.

The second largest contributor was Taiwan Semiconductor Manufacturing (TSMC), the leading foundry of advanced chips. Its recent earnings results were stronger than expected: with AI demand driving higher profits and strong guidance for the year ahead, it announced new capital expenditure plans to try and narrow the gap between its supply of advanced chips and customer demand. Over the longer term, TSMC’s unrivalled position at the most advanced process nodes, combined with its deep and longstanding customer relationships, gives it clear structural advantages. We see it as a natural beneficiary of “productisation” – the diffusion of AI into end-devices and industrial applications – which we believe will accelerate over the coming years, even if near-term data-centre spending normalises.

The third largest contributor was WEG, a Brazilian industrial group and global leader in electric motors, generators and automation solutions. Its performance was driven by strong investor enthusiasm for the company's exposure to several structural growth themes. Demand for power transformers surged as electricity grids came under pressure from data-centre construction and the broader energy transition, while interest in battery energy storage added further momentum.

On the negative side, India’s HDFC Bank was the largest detractor from performance. Its improvement in net interest margin has been slower than expected, as it continued to face a challenging operating environment. The resignation of the chairman has 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 bank’s 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 mid-teens or higher, which is attractive in absolute terms.

Trip.com was the second largest detractor. 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, we are confident Trip.com will be resilient to AI disintermediation. 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.

The third largest detractor was Sea Ltd, the largest e-commerce, fintech and gaming platform in Southeast Asia, with growing businesses in Taiwan and Brazil. Its shares declined after it reported tighter margins due to the ongoing investment into its e-commerce business. On the other hand, revenue growth was strong, and its credit business expanded at a brisk clip. With a model focused on low costs and being competitive on prices, Sea can serve a layer of customers that no one else can touch, and profitably too. We believe the management and the culture are worth backing, and execution continues to be strong across all three businesses.

New purchases over the quarter

Full Truck Alliance (FTA) is a leading digital freight platform in China with a strong competitive moat and a long growth runway. FTA should continue to strengthen with scale, as shippers move more of their business on to the platform, driven by cheaper prices, which then drives more truckers to the platform, and so on. The business is still in the early stages of monetisation (which implies room to grow), margins are expanding, and it is cash flow generative. Meanwhile, new growth opportunities, such as cargo pooling, could also open up once it reaches a minimum viable scale.

PDD is a leading e-commerce company in China. Founded by Colin Huang – widely respected and recognised as a capable leader – the company is an innovator within China’s e-commerce industry, having disrupted the seemingly mature market by bringing customers directly to farmers and manufacturers. Positioned as a “value-for-money” platform, it is a highly profitable and cash flow generative business, while being less capital intensive vs. peers. We believe it has good growth potential, with a franchise that continues to strengthen.

Kotak Mahindra Bank 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. The new CEO, Ashok Vaswani, has aspirations to grow the business, with greater focus on consumer banking and digitisation. We expect to see a growing trend of formalised financial savings, benefiting Kotak’s insurance, mutual funds and asset management businesses

Complete sales over the quarter

We sold out of several positions where we had lower conviction, in order to consolidate the portfolio among a smaller number of companies with better long-term prospects. These divestments included:

Tube Investments, a diversified Indian industrial conglomerate with businesses spanning precision steel tubes, automotive components, bicycles and financial services.

Advantech, a Taiwan-based technology company specialising in industrial computing, embedded systems and solutions for automation and smart manufacturing applications.

Ayala Corp, one of the Philippines' oldest and largest conglomerates, with interests spanning real estate, banking, telecoms, water, healthcare and renewable energy.

Looking forward

The situation in the Middle East is clearly clouding the near-term outlook. Around 20% of global seaborne oil and liquefied natural gas (LNG) flows through the Strait of Hormuz, so any disruption has immediate implications for energy prices, freight costs and inflation.

Our base case is that there are political constraints – particularly for the US – that should limit the duration of the conflict and lead to some degree of de-escalation in coming weeks. That said, history shows these situations can evolve in unintended ways. If the conflict persists or escalates, the implications would extend well beyond the region and into the global economy.

In terms of portfolio impact, the first-order effects are largely regional, where we have no exposure. The second-order effects are more relevant: energy flows through the Strait and the resulting price impact. Asia is particularly exposed given its reliance on imported energy from the Middle East. South Asia – especially India – is more vulnerable, as energy is both a large import item and a meaningful component of CPI, which is likely to weigh on consumption. North Asia will also be affected, though the impact should be more muted given higher income levels and greater resilience.

Against this backdrop, we remain confident in the strategy’s ability to navigate the environment. The companies we own benefit from strong competitive positions – whether through network effects, brands, distribution, cost leadership or high switching costs for essential products and services. Historically, this has translated into pricing power and the ability to protect margins even in more inflationary or volatile conditions.

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. 

Rasmus and Rizi 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 year) and bear markets (more than 15% decline), than in steeply rising markets (defined as over 15% returns over one year). 

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. 

Sea is the largest e-commerce, fintech and gaming platform in Southeast Asia, with growing businesses in Taiwan and Brazil. The e-commerce business (75% of sales) is complex, but its model is focused on the lowest cost structure and being competitive on prices, which allows Sea to serve a layer of customers that no one else can touch, and profitably too. The margins are admittedly thin for now, but it seems like the hard work is done. From here, it should be easier to grow the business and unlock operating leverage. The management and the culture are worth backing, and execution has been consistently strong across all three businesses. 

Nu Holdings is a digital-only bank in Brazil with over 100 million customers. Founded in 2013, it has disrupted large incumbent banks thanks to its superior customer service and lower costs. There is strong alignment with the leadership team and a prudent lending culture. The company has achieved decent profitability while the growth outlook is robust, driven by increasing credit penetration and additional service offerings (such as secured loans and digital payments). 

Complete sales:

Milkyway Intelligent Supply Chain is a chemical materials logistics company in China. We sold out of the position on concerns about leverage and poor cash generation. 

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. 

Voltronic Power is a Taiwanese company specialising in uninterruptable power supply (UPS). We sold out of a lower conviction holding to raise cash for better ideas elsewhere. 

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

Continuity and change

It would be remiss not to mention the significant changes that have taken place at Stewart Investors over the last quarter. After acting as careful stewards of our clients’ capital over many years, three of our colleagues stepped back from their portfolio-management responsibilities in August and left the business. While our team looks different now than it did when the quarter began, on a deeper level, nothing has changed: the philosophy and approach that has defined Stewart Investors since 1988 is deeply engrained and continues to define what we do. Our structure is flat. Every member of the investment team is first and foremost an analyst and our collective focus is on identifying high-quality companies, with resilient financials, guided by ambitious stewards.

This strategy’s new lead manager is Jack Nelson, who was formerly its co-manager. He joined Stewart Investors in 2011 and is the lead manager of our Global Emerging Markets Leaders strategy. He continues to apply the same principles to managing this strategy that have guided it since its launch, working as part of the same tight-knit group of investment analysts and drawing on the same common pool of investment ideas.

Activity

We added one new holding to the portfolio during the quarter. Ayala (Philippines: Industrials) is owned by the seventh generation of Zóbel de Ayala family and its interests span property, banking, car dealerships, renewable energy, and retail. Like us, the Zóbel de Ayala family focus on finding long-term growth opportunities. The Philippines appears to be rich in those opportunities. For example, while around half of Filipinos don’t have a bank account, lenders such as Bank of the Philippine Islands (BPI, in which Ayala is a major shareholder) are opening new branches, acquiring new customers, and promoting financial inclusion.¹

We sold several holdings where we had lost some confidence in our investment thesis. Vitasoy (Hong Kong: Consumer Staples) has struggled with supply-chain issues. This year, however, its shares have rallied in response to rumours of a takeover bid. This provided a good opportunity for us to sell the holding and reinvest the proceeds in companies where we have great of confidence.

We also sold home appliance manufacturer Zhejiang Supor (China: Consumer Discretionary). A subsidy programme introduced by the government earlier this year offers Chinese consumers financial incentives to trade in and upgrade their home appliances. This has helped to foster positive sentiment towards Zhejiang Supor. Looking longer term, however, the outlook for its future growth appears to be muted, so this appears to be a good opportunity to sell.

Elsewhere, we sold out of Hoya (Japan: Health Care) which, despite being listed in Japan, sells the majority of its products into emerging markets. We also sold Tata Communications (India: Communication Services) and Jerónimo Martins (Portugal: Consumer Staples). In all three cases, these companies’ shares appeared somewhat expensive given the growth on offer. We believe new ideas such as Ayala – as well as our other existing holdings – now represent better homes for our clients’ capital.

1 Source: World Bank Global Findex database https://databank.worldbank.org/source/global-findex-database. 2024 data for metric: account (% age 15+) which measures the percentage of respondents having an account at a bank or similar financial institution or using a mobile money service.

Looking ahead, we remain particularly positive on the prospects for high-quality companies in India. The central bank recently started cutting interest rates, which should support demand in rural India. Towards the end of the quarter, we attended a conference of Indian companies and were struck by how positive all of them were about the growth opportunities ahead of them over the next 10 years. In our view, this potential growth – and the size of the Indian market – should continue to offer powerful support to share prices. 

[1] Source: Financial Times, 30 June 2025 ‘US dollar suffers worst start to year since 1973’.

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