Key takeaways
- Asia equity markets remain heavily influenced by a narrow, AI-led rally. The portfolio retains an underweight to this thematic due to exuberant sentiment combined with an insufficient appreciation of risk by the market. That said, this underweight is being managed pragmatically through select IT exposure.
- Opportunities are emerging beyond the dominant technology trade, particularly in China, Indian domestic growth and real assets such as gold and copper.
- Recent performance headwinds reflect deliberate positioning driven by a consistent investment process, focused on identifying mispriced opportunities where fundamentals, sentiment and valuation are aligned.
A market defined by concentration
Asia Pacific ex Japan equity markets continue to be shaped by unusually narrow leadership. Returns have been dominated by a small number of technology and semiconductor stocks linked to the AI theme, leaving many companies with attractive fundamentals lagging behind.
This concentration has had a direct effect on relative performance. The Fidelity Asia Strategy has maintained a deliberate underweight to the most crowded parts of the technology sector, reflecting concerns around valuation and risk. In an environment where a handful of stocks have accounted for a disproportionate share of index returns, this positioning has been a meaningful headwind.
The scale of this concentration is notable. Samsung Electronics, SK Hynix and TSMC contributed over 315% of the benchmark return for the 6mths ending March 2026, making it increasingly difficult for portfolios to keep pace without material exposure to those same stocks and/or, increasing risk by investing in ‘proxy’ companies. For example, the next best alternate company. Too many such investments often produces suboptimal portfolio metrics through lower diversification and likely higher volatility. This has not happened with the Fidelity Asia Strategy.
Views on the AI cycle
The long-term structural case for AI remains intact. However, key concerns are how the market is pricing, or valuing, individual companies and the lack of risk analysis.
Much of the current narrative focuses on seemingly unlimited demand for AI infrastructure. Less attention is being paid to supply dynamics, particularly in memory and semiconductors. Tight supply conditions have driven a sharp increase in memory prices over a short period. While this supports near-term profitability for suppliers, it also raises questions about sustainability. Capacity constraints are already evident and beginning to ration demand through higher pricing. This is evident in sectors such as industrial, smartphones and PCs. Taking it a step further, undersupply could eventually constrain the demand from hyperscaler customers. If the cost of AI infrastructure continues to rise, returns on investment for large technology companies may come under pressure, leading to more disciplined capital expenditure.
There are also signs of changing market behaviour, specifically how share prices are reacting to news flow. Strong earnings results from several semiconductor companies have not been rewarded to the same extent as earlier in the cycle. In fact, they were sold on the back of ‘blow out’ earnings beats and valuation multiples have begun to compress.
Additionally, the stock prices of cyclical companies tend to peak when margins reach their highest levels. Current market expectations imply lofty margin forecasts across swathes of the AI supply chain, an assumption that may prove optimistic based on past experience.
Taken together, such factors suggest the AI trade may be transitioning from a broad, momentum-driven phase to a more discerning, and concentrated end game within the region.
Managing the AI underweight
While the view on AI-related valuations remains cautious, portfolio positioning has evolved to manage risk around the IT underweight.
Technology remains the largest sector underweight, although the extent of that has been reduced. As part of the portfolio’s risk management framework, positions are assessed against the potential impact of significant relative moves, including scenarios where an underweight holding could outperform the benchmark by 30% or more in a 12-month period. In the current environment, the scale of the IT underweight, particularly in memory, had reached a point where such an outcome would be too costly to absorb.
In response, selective exposure was added or increased in names such as SK Hynix, Samsung Electronics, Gold Circuit Electronics, Elite Material and TSMC. These positions are not a shift in the underlying view on the AI cycle, but rather an adjustment to manage risk in a market where momentum can persist for longer than expected.
Korea and the memory trade
South Korea provides a clear illustration of the current market dynamic. The market is heavily dominated by SK Hynix and Samsung Electronics, effectively making the market a single, concentrated exposure to the global memory cycle.
While the portfolio has recently added exposure to these companies, it remains underweight overall. The key risk is that retail participation and momentum continue to drive the sector higher, potentially creating a further disconnect between fundamentals and valuations.
This scenario represents one of the more challenging near-term risks for the strategy: a continued “melt-up” in a narrowing part of the market where sentiment becomes difficult to quantify.
Opportunities beyond the dominant AI narrative
Away from technology, a broader set of opportunities is emerging, supported by more attractive valuations and solid fundamentals.
China: consumer resilience and early signs of stabilisation
China remains an area of focus, particularly within consumer-facing businesses. While macro conditions are exhibiting signs of stabilising, several companies continue to deliver strong operational performance.
Yum China is a good example, with consistent earnings growth, margin improvement and rising returns.
There are also tentative signs of stabilisation in the property market. China Overseas Land was introduced into the portfolio before the market recognised a potential bottoming process was forming.
A further potential tailwind comes from the maturity of household deposits. A significant proportion of Chinese savings will roll off higher interest rates this year. Limited alternative investment pathways exist for investors given the closed capital structure in China. This creates a potential reallocation dynamic as investors seek higher returning options in equities, property or gold.
India: adding to domestic growth exposure
The Indian stock market has experienced a period of weakness, driven in part by higher energy prices from the Iran war and foreign investor outflows. This has created opportunities to add selectively at more attractive valuations.
Positions have been increased in financials, whilst Titan, a leading branded jewellery retailer was introduced into the portfolio. The company benefits from rising incomes, premiumisation and the ongoing shift from unorganised to organised retail which offers a long runway for growth.
The broader approach in India reflects a consistent use of market weakness as a source of new ideas while maintaining discipline around valuation.
Real assets: an area of conviction
Real assets remain a key pillar of the portfolio, particularly gold and copper.
Zijin Mining and Zijin Gold continue to be high-conviction holdings, supported by strong production growth and exposure to our two most favoured metals. The investment case is underpinned by the view that long-term commodity price assumptions may be too conservative in a world characterised by constrained real interest rates.
Gold appears to be misinterpreted by the market, at least in the short run. In an environment where higher energy prices are acting as a form of monetary tightening and global debt levels remain elevated, sustained increases in real interest rates appear unlikely. This creates a supportive backdrop to accumulate gold.
Stock selection in a difficult market
One of the defining features of the current environment is the increasing disconnect between fundamentals and share price performance.
Several holdings, including SEA, Tencent and Fuyao Glass, have exceeded expectations at an earnings level, yet have lagged in relative performance terms due to what we believe is the market’s narrow focus on AI-related names.
At the same time, one of the Strategy’s largest holdings, Techtronic Industries, has contributed positively reflecting strong operational performance and exposure to long standing structural growth areas.
This divergence highlights the importance of maintaining a disciplined, bottom-up approach, even when short-term market dynamics appear unfavourable.
Process discipline remains consistent
Despite recent performance challenges, the underlying investment process remains consistent.
The portfolio is constructed using a framework based on fundamentals, sentiment and valuation, with a focus on identifying situations where market expectations diverge from our own assessment.
Importantly, the strategy has not shifted towards chasing momentum despite the prevailing market environment. Instead, it continues to use strong momentum as an opportunity to reduce exposure where a thesis has played out, and negative momentum as a potential source of new ideas.
There has been a focus on risk management and position sizing, particularly in areas where market concentration creates the potential for outsized short-term volatility.
Outlook: a greater emphasis on risk is required
While the AI theme remains important, its dominance has created a narrow market structure that is highly unlikely to persist. As expectations become more demanding or misguided, the likelihood of a broader rotation increases.
At the same time, macro conditions remain uncertain. Energy prices, geopolitical tensions and shifting inflation dynamics continue to influence market behaviour across the region.
In this environment, the focus remains on:
- maintaining exposure to areas with structural tailwinds, such as real assets;
- identifying mispriced opportunities in regions such as China and India;
- and managing risk in areas where the Strategy remains underweight.
The portfolio should benefit from normalisation in market leadership, while retaining sufficient flexibility to navigate volatility.
Positioning for a broadening opportunity set
The current environment is defined by concentration, momentum and elevated expectations. While this has created short-term challenges, it has also increased the scope of investible ideas.
The Fidelity Asia Strategy remains focused on high-conviction stock selection, grounded in a disciplined and repeatable process. Positioning reflects both caution towards crowded areas of the market and conviction in a broader set of targets across the region.
As the AI cycle evolves and market dynamics shift, the emphasis remains on identifying companies where fundamentals, sentiment and valuation are aligned with the objective of delivering attractive outcomes over a full market cycle as market leadership changes and other factors, besides momentum, reassert themselves.
