Fidelity Asia Fund

If the third quarter was a sports match, we were behind until the last ten minutes then we came roaring back as everything clicked and we ended up performing, outperforming the benchmark by returning 8.5% against the benchmark return of 6.3%.

A lot of that was driven by the turnaround in our Hong Kong and China holdings. So, stocks like AIA, an insurance business in Hong Kong, Techtronic, a power tools business and Yum China who own the KFC and Pizza Hut franchises in China. These are very much examples of stocks that were grinding out decent earnings and returns but were just completely smashed for most of the year because they are Chinese consumer stocks, an area of the market that the market is very, very negative towards or has been very negative towards. But they've been churning out returns and earnings and as sentiment turned as it did right towards the end of the quarter, those stocks got significant support and they produced some very strong returns for us.

Also, in terms of contributors, we are underweight in Taiwan where we’re quite negative towards the tech sector, and of course, Taiwan is a very tech heavy market. And then we had some nice contributions as well from new positions such as CP All in Thailand where we're seeing tourists return to Thailand and with that, we're seeing same store sales growth in 7-Eleven stores which CP All own, and margin improvements as well.

But it wasn't all good news. We do have some detractors as well. So HDFC Bank, the biggest privately managed bank in India, just didn't really do anything during the quarter, and essentially flatlined. There's some concerns around lower loan growth going forward. So probably 8 to 10% loan growth for the rest of the year. And with that we've seen some earnings cuts as well which has been reflected in a relatively weaker share price performance. We think the earnings cuts are coming towards the end and valuations are actually very supportive from here.

And one other detractor of note as well is Samsung. We are generally seeing some of the steam, the hype and the steam come out of the tech sector, particularly towards AI. We've turned relatively negative I would say on that whole sector. We think that it can't continue to grow at an exceptionally fast rate and maybe the market's expectations were a little bit too exuberant compared to the reality of the fundamentals.

With Samsung, we saw that they came out with some relatively decent earnings particularly around D-RAM memory and it had some relatively positive news towards high bandwidth memory as well which they're moving into and is a key part of their AI business.

However, the market didn't really do anything and that told us that maybe there is that steam coming out of the whole AI theme which gave us cause for concern. And we've also completely sold out of the position now because we feared that there may be a buildup of potential inventory in the D-RAM spaces. PC and smartphone companies were essentially front-loading D-RAM memory spending for fears that maybe D-RAM pricing will be going up. So, we're completely out of Samsung here but it was a detractor over the quarter.

The biggest game in town right now is of course China. So, towards the end of the quarter, we finally saw some meaningful stimulus which got the market quite excited. It started off with easing the monetary conditions. So, rate cuts and so on, which was a nice signal to the market that there were easing conditions ahead and that was quickly followed up by announcements that there will be some fiscal stimulus. Now from here, we need to see what that fiscal stimulus actually is.

We don't really have the granular detail but there are pretty lofty expectations now that there will be a lot of targeted fiscal stimulus towards areas linked to the consumer and hopefully even in the property market. And if they come through and the heightened expectations of the market are met, we could see some really strong returns on the China market. But it is quite policy, and I would say message driven as we look ahead, particularly towards the end of this year.

If it comes through, then we could finally see this long-awaited rerating of the China market. We have seen some sharp share price rallies in recent weeks and that could be prolonged if that messaging is clear and also the packages that are announced on the fiscal stimulus side are deemed big enough to address some of the quite hefty problems that we've seen in the China market.

Outside of China where we are relatively excited if this comes through, we are, I would say, relatively more tepid when it comes to India. Yes, the broad macro story and the development story there is great. But share price valuations and very, very expensive and it's almost like there's no risk priced into the stocks. That to us is a concern.

But where we are also, I would say relatively more positive going forward is in the ASEAN markets. The ASEAN markets have been the forgotten child. No one's talked about them for many years. They've just fallen off a cliff in terms of people's memory. And for us, those markets are becoming exciting and interesting because we are seeing some relatively positive changes there. As I've mentioned earlier, Thailand is starting to see the tourists coming through the gate. That's good for the Thai economy.

We're starting to see markets like the Philippines grinding back after quite a few years in the doldrums when it comes to the macro scenario. So for us the ASEAN markets where they've been completely forgotten, teamed with what looks like a slightly more improved macro environment, could actually produce some decent returns for us at the stock level.