Latest trust commentary - SOI

Performance overview

• Asian equities, as measured by the MSCI AC Pacific ex Japan index, rose slightly in the third quarter in sterling terms but underperformed developed markets in aggregate. Renewed escalation of the Middle Eastern conflict weighed on sentiment, as the US and Iran resumed military strikes, while the Yemeni Houthi rebels declared a blockade on Saudi shipping in the Red Sea, pushing Brent crude oil back above US$100 per barrel. Consequently, higher inflation expectations fed through to the global economy.
• The weakest benchmark index market was Korea. Despite strength in technology and AI-focused stocks early in the quarter, profit-taking and worries about the sustainability of the memory companies earnings trajectory as well as the impact of higher oil prices on the economy drove the market lower. The Philippines was also notably weak, faced with persistent inflation and interest-rate concerns, which weighed on domestic demand and other economically sensitive sectors. Thailand also fell.
• Singapore was the best-performing market by far due to its relative economic stability and strong performance from its large-cap bank stocks. In contrast to Korea, Taiwanese equities also strengthened. Resilient earnings momentum, Taiwan’s central role in the global AI supply chain and TSMC’s technology leadership underpinned the market’s outperformance over other Asian markets, despite growing scrutiny of AI investment returns. China equities were volatile but ultimately ended the third quarter higher, despite concerns over persistent local economic weakness. Hong Kong also did well, while Australia made a small gain and outperformed the index.

Drivers of fund performance

• The fund produced a positive return over the quarter and materially outperformed the MSCI AC Pacific ex Japan index.
• At the regional level, stock selection was positive, especially so in Korea, which helped to offset weak performance in China. Allocation also contributed, with the underweight exposure to Korea proving to be particularly beneficial, while the overweights to Singapore and Hong Kong were supportive as well.
• On a sector basis, selection was strongest by far in information technology (IT), while it also contributed notably in financials. The underweight to IT and overweight to financials also aided returns.

Outlook/positioning

• Of all the market and economic news during the month, potentially the most significant has been the break-out on the upside in US long-bond yields. Yields at current levels could present much more of a challenge for equity markets, given the higher cost of capital and competition for investor flows. Most Asian central banks will likely follow the US in hiking rates to support local currencies and dampen demand, none of which is helpful for domestic economies.
• Regarding technology and AI, investors generally appreciate that many technology companies are clearly “over-earning”, with forecast margins in their subsectors substantially above historical norms. However, these record margins are likely to be unsustainable in the longer term. Capital expenditure is now increasing rapidly within the industry, and supply should ramp up more materially in 2027 and beyond. This will eventually ease current shortages and is likely to trigger a normalisation in selling prices, margins and returns on capital over time. As markets approach the potential inflection point in supply and pricing, investors should expect increased nervousness over the path of the downcycle and, consequently, greater share-price volatility.
• Outside of technology, the broader Chinese economy remains very subdued and there have been relatively few significant domestic policy announcements in recent months. Despite reported headline GDP growth of approximately 4.5-5.0% and high-profile successes in electric vehicles, robotics, domestic AI models and semiconductors, the broader bottom-up economic picture remains challenging. Residential-property activity and prices remain weak, and the sector continues to weigh on household confidence and consumer spending. The domestic economic backdrop is, therefore, still fragile and deflationary. The corporate earnings picture is mixed, and any slowdown in exports could exacerbate deflationary pressures. Although we remain underweight, given the bottom-up value, we have continued to look to add selectively to our China exposure. Our overweight to Hong Kong leaves us much less underweight to the combined Hong Kong / China index weight than we would have been a year ago.
• Valuations across Indonesia, the Philippines and Thailand are undemanding, but local economic growth is generally soft, and political uncertainty is affecting both domestic confidence and foreign capital flows. While the recent stabilisation in ASEAN markets is a positive, the bottom-up opportunity set remains relatively narrow, and, outside of Singapore, we continue to have very modest aggregate exposure there.
• Aggregate price-to-earnings multiples for regional equities remain well below historical peaks. However, this picture disguises enormous dispersion at the country and sector levels. We are not rushing to increase overall exposure, given expectations for a period of heightened volatility as the debate over the AI cycle plays out. However, at the individual stock level, we continue to see attractive longer-term opportunities across Asian equities.
• Turning to dividends, there has broadly been a pick-up in the absolute level of dividend payments over recent months. This is, though, reliant on an ongoing improvement in the underlying earnings of the companies where the recent conflict in the Middle East has led to greater uncertainty. The level of sterling against Asian currencies will also continue to influence the absolute level of dividends received.
• We continue with our bottom-up investment approach and look for good companies where we can clearly see a strong income case and the potential for capital growth, while remaining disciplined about valuations. We are continuing to construct portfolios with more diversified exposure, to balance the risks and opportunities. We retain the highest-quality positions in companies benefiting from the structural expansion of AI in the Asian technology supply chain. However, we are balancing these holdings with investments across other domestically focused segments of markets with compelling valuations and other non-tech export cases with supportive tailwinds for growth.

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• China risk: If the fund invests in the China Interbank Bond Market via the Bond Connect or in China "A" shares via the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect or in shares listed on the STAR Board or the ChiNext, this may involve clearing and settlement, regulatory, operational and counterparty risks. If the fund invests in onshore renminbi-denominated securities, currency control decisions made by the Chinese government could affect the value of the fund's investments and could cause the fund to defer or suspend redemptions of its shares.
• Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down.
• Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.
• Currency risk: If the Company’s investments are denominated in currencies different to the currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
• Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund.
• Emerging markets & frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets.
• Gearing risk​: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.
• Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
• Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
• Operational risk​: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
• Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
• Private market valuations, and pricing frequency: Valuation of private asset investments is performed less frequently than listed securities and may be performed less frequently than the valuation of the Company itself. In addition, in times of stress it may be difficult to find appropriate prices for these investments and they may be valued on the basis of proxies or estimates. These factors mean that there may be significant changes in the net asset value of the Company which may also affect the price of shares in the Company.
• Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.