Fast reading
- Asian equities in Q2 this year were dominated by a narrow cohort of high-beta, AI-related stocks, with sharp reversals and rapid factor rotations overwhelming fundamentals and valuation discipline. While this has created short-term relative headwinds for a differentiated, conviction-led portfolio such as ours, it is important to frame recent performance in the context of these exceptional market dynamics and our longer-term investment approach.
- The first quarter was particularly volatile, marked by strong early gains followed by a sharp risk-off reversal in March. This pattern has persisted into the second quarter, as markets have aggressively chased momentum.
- Below, we outline the key drivers of recent relative moves, and why we remain confident in the Asia ex-Japan Equity portfolio’s positioning and long-term return potential.
In the second quarter of 2026, Asian equities (ex-Japan) rebounded sharply from Q1, with improved geopolitical sentiment and renewed risk appetite driving a highly concentrated, momentum-led rally focused on AI-related semiconductor hardware.
Regional dispersion was extreme. South Korea and Taiwan led the gains on strong earnings and guidance across the artificial intelligence (AI) supply chain, while Hong Kong and India indices lagged, highlighting the increasingly narrow leadership driving index performance.
Momentum has been the dominant factor, illustrating the degree to which flows have favoured a small subset of stocks.
Recent activity
Our portfolio activity over April and May reflected our continued focus on selectively adding to areas of long-term opportunity while exiting positions where upside had moderated or the investment case had evolved.
We increased our position in the A-share listing of a Chinese battery manufacturer and clean energy technology firm, where we continue to see strong structural growth supported by its leading position in battery technology. We also added to select small South Korean holding company exposures, which, we believe, continue to trade at a significant discount to the value of their underlying assets and may be disproportionate beneficiaries of improving corporate governance and capital allocation. During May, we exited several positions in South Korea and China, reflecting a combination of valuation discipline and a reassessment of relative opportunity.
We re-initiated a position in a multinational Chinese search engine business, where we see improving visibility on AI-driven growth led by its cloud infrastructure capabilities. While legacy advertising remains a near-term overhang, we view emerging contributions from areas such as robotaxi services as potential additional medium-term catalysts. We believe a sum-of-the-parts framework suggests meaningful upside, supported by a strong net cash position that offers the potential for downside protection.
We also initiated a position in a Chinese biotech-led skincare and medical aesthetics company. We expect growth to recover into 2026, with longer-term upside from the company’s collagen injectables pipeline. Following a sharp share price decline, the stock offered an attractive entry point and trades at a meaningful discount to the sector, with the market appearing to have priced in uncertainties around brand repositioning and competitive pressures.
Our perspective
This market environment is not without precedent. The closest recent parallel is 2020, when momentum outperformed the broader benchmark by over 50% and capital became heavily concentrated in a narrow cohort of high-growth, often non-profitable companies. At that time, we took a clear and deliberate stance: we chose not to participate in increasingly speculative areas of the market, including several ‘meme’ stocks trading at ever higher multiples despite weak underlying fundamentals.
Instead, we leaned into parts of the market where valuations and cash flows provided tangible support, most notably China and select cyclical businesses, the ‘Fords’ of the market, offering highly attractive dividend yields at deeply discounted multiples. That positioning required patience but ultimately proved well founded as market leadership normalised and fundamentals reasserted themselves through 2021 and 2022.
Today’s environment presents a more nuanced challenge. As in 2020, returns are highly concentrated and momentum-driven, now centred on AI beneficiaries. However, unlike then, the current market leaders are not uniformly expensive. Select semiconductor memory names, for example, are delivering extraordinary earnings and, in some cases, still trade on low forward multiples of around 6–7x.
The valuation paradox
The present scenario creates an important paradox. On the surface, these companies appear inexpensive; in reality, those valuations are anchored to exceptionally strong and potentially peak-cycle earnings. What matters, therefore, is not simply the multiple, but the sustainability of the earnings base to which that multiple is applied. In our view, current pricing in parts of the AI supply chain increasingly reflects expectations that are both elevated and fragile. Should demand normalise, supply respond, or capital intensity rise, there is a risk that earnings expectations are reset, potentially sharply. In such a scenario, what appears optically cheap today may prove less so in hindsight.
We therefore characterise parts of this opportunity set as ‘ambiguously cheap’: attractive on near-term metrics, but with a high degree of uncertainty around the durability of current profitability and the point in the cycle those earnings represent.
Our response has been highly selective. We retain exposure where we believe the asymmetry is favourable. By contrast, we have avoided more crowded areas where upside is more dependent on sustained peak conditions.
A dispersion in expectations
This caution is reinforced by the broader market backdrop. Many global equity markets, including the US, Japan, Taiwan, South Korea and India, have been trading at or near all-time highs. By contrast, China, Hong Kong and parts of Southeast Asia remain well below prior peaks, in some cases by a significant margin. This divergence reflects a meaningful dispersion in expectations, with capital concentrated in perceived winners while other markets continue to price in a far more pessimistic outlook.
In contrast to these ‘ambiguously cheap’ areas, other parts of the market, most notably China and selected parts of Southeast Asia, remain what we would describe as ‘unequivocally cheap’, with valuations that embed a far greater degree of pessimism and offer clearer asymmetry alongside a stronger margin of safety. This is evident not only at the index level but also in high-quality franchises. A major Chinese tech firm, for example, continues to deliver solid operating performance with earnings growth in the high teens, yet trades at approximately 11x forward earnings – a level that would be difficult to reconcile with an equivalent US-listed peer, where comparable assets would likely command materially higher multiples.
As history has shown, periods of extreme concentration tend not to persist indefinitely.
First principles
From a first-principles perspective, the macro backdrop further reinforces this opportunity. Chinese risk-free rates remain exceptionally low, with the 10-year government bond yielding around 1.7% and deposit rates below 1%. Against this backdrop, the Hang Seng Index offers a dividend yield of over 4%, among the highest across major global markets. This combination – low cost of capital, depressed equity valuations, and elevated income – may help make the case for equity ownership. Similar dynamics are evident in parts of Southeast Asia, particularly in banking systems where profitability remains robust and valuations undemanding.
Taken together, this reflects a deliberate two-pronged approach: participating selectively in areas of genuine structural growth where the risk-reward remains favourable, while continuing to lean into markets and businesses where valuations are more clearly supportive and downside risk is better protected.
As history has shown, periods of extreme concentration tend not to persist indefinitely. When leadership broadens and fundamentals regain primacy, we believe this balance between participation and discipline will position the portfolio to capture more durable, risk-adjusted returns.
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