The current opportunity in Asian small and mid caps

Himalee Bahl, Investment Director of Fidelity Asian Values PLC, reviews the fundamental backdrop facing investors in Asia. Amid near-term headwinds, she outlines why she believes the Trust can continue to reward investors, focussing on the potential for strong long-term performance regardless of market cycles.

Over the past few months, investors have seen a very narrow market environment characterised by momentum-driven flows into specific sectors. This period has been marked by considerable enthusiasm around areas such as electric vehicles and artificial intelligence, where fundamentals and valuations have become increasingly misaligned with market pricing.

Sticking to our investment discipline

Against this uncertain backdrop, we have continued to adhere to our investment process consistently, creating significant value - with the Trust performing strongly over the last five years.

Past performance is not a reliable indicator of future returns.
^{Source: Morningstar as at 31.07.2025, bid-bid, net income reinvested.
©2025 Morningstar Inc. All rights reserved. The MSCI AC Asia ex Japan Small Cap (N) Index is a comparative index of the investment trust.}

The Asian Values Trust's investment philosophy consistently focuses on owning good businesses run by competent and honest people, purchased with a margin of safety. This disciplined value-investing framework identifies durable opportunities through comprehensive research in undervalued markets. By adopting a contrarian approach, we intentionally target areas currently out of favour, steering clear of those driven purely by market momentum. This strategy allows us to effectively position ourselves to deliver robust client outcomes over the long term, regardless of market and style cycles.

The opportunity in small and mid-caps

For some time now, the portfolio has maintained a meaningful allocation to Chinese small and mid-cap companies. We believe that the quality of physical and intellectual capital available in China represents a significant long-term competitive advantage for the country. Selected Chinese holdings represent businesses that possess enduring competitive advantages but have remained out of favour among investors due to broader market sentiment concerns.

Chinese small-cap stocks lagged the broader Asian small-cap universe during the second quarter of 2025, when geopolitical tensions following US policy announcements created sharp uncertainty, which has negatively impacted performance outcomes over this period.

The portfolio's allocation to Indonesia has also contributed to more subdued performance over this timeframe. Market interest has shifted toward technology-heavy markets such as Taiwan and South Korea, where recent developments around artificial intelligence have boosted investor confidence. Select South Korean holdings have contributed to absolute performance, but our relative performance has been affected by our overall avoidance of market momentum.

We have been particularly cautious regarding the elevated valuations in Taiwan's small-cap segment, where investor interest has surged due to its association with artificial intelligence themes. Our long-standing investment discipline requires us to maintain distance from such crowded areas of the market where the quality value approach that drives this Trust steers away from speculative positioning.

It is relevant to highlight our holding in Taiwan Semiconductor Manufacturing Company, the world's largest semiconductor foundry, which remains a noteworthy large-cap position in the portfolio. We maintain this position for its notable and sustained market leadership and high-quality management team. Among the Trust's basket of large-cap holdings, this position was a leading contributor during the quarter, with shares rising following strong earnings from US technology companies, particularly NVIDIA, in late May.

Opportunity in uncertainty

Looking ahead, recent developments involving US trade policies and China's retaliatory measures have created a challenging environment for investors and businesses worldwide. The prevailing situation poses tangible risks to global growth trajectories. Our recent corporate engagements indicate that uncertainty surrounding these economic confrontations is impacting corporate decision-making processes, particularly regarding future expansion plans and supply chain management strategies.

Our strength lies in an investment approach that focuses on individual stocks and fundamentals, and we find it difficult to predict how macro events will unfold with precision. As always, our focus remains on identifying and owning businesses of superior quality compared to the broader market, available at attractive valuations that provide meaningful downside protection.

We continue to identify promising opportunities across China, Indonesia, and South Korea. These markets offer numerous prospects for investing in well-financed and well-managed businesses with significant margins of safety. For example, in Indonesia, we find high-quality financial institutions and select long-term winners in consumer staples available at appealing valuations.

Although South Korea generally offers lower returns on equity due to historical corporate governance challenges, there are encouraging signs of improvement. We are focusing on companies where we feel more confident about the potential for enhanced capital allocation policies and operational improvements.

Meanwhile, the Trust consistently avoids sectors and markets that most investors currently find fashionable, such as AI-driven hardware themes in Taiwan and overpriced small-cap opportunities in India, where valuations have been stretched by speculative interest.

Maintaining conviction in uncertain times

The current environment of geopolitical tensions and market volatility reinforces the importance of our disciplined investment approach. While macro uncertainties surrounding US-China trade relations and shifting supply chains create near-term challenges, they also generate the market dislocations where superior long-term returns are typically found.

Our strategy remains unchanged: identifying well-managed businesses with sustainable competitive advantages, strong balance sheets, and compelling valuations across underappreciated Asian markets. History demonstrates that the best investment opportunities often emerge during periods of uncertainty, when quality companies trade at discounts to their intrinsic value.

By maintaining our focus on individual stock analysis and avoiding the crowded trades that attract momentum-driven capital, we remain confident in our ability to deliver sustainable long-term value for investors willing to look beyond short-term market noise.