Our main sector overweight positions remain in the consumer staples, information technology, and health care segments, where we see more domestic consumption.

In contrast, our most significant sector underweights are now financials, energy, and telecommunication services. Over the period, we raised our exposure in consumer staples, health care, and industrials as we found stock-specific opportunities in these areas.

We were more underweight in financials and real estate.

On a country basis, our biggest overweights are in India and Hong Kong, where we trimmed our exposure. Stock-specific opportunities compelled us to narrow our underweight in China.

Added Exposure to Chinese Consumer Staples

In the fourth quarter, we reduced our underweight in China, our largest country underweight, amid signs of stabilization in the manufacturing sector and solid domestic consumption. However, high debt levels and the depreciation of the renminbi continue to be areas of concern for us. We view the reform of state-owned enterprises as key to China's medium- to long-term growth.

• We initiated a position in Yum China, the spinoff from YUM Brand, the franchisee for KFC and Pizza Hut in mainland China. It has a high return and cash generative business in a fragmented industry.

Hong Kong Exposure Trimmed on Valuation Grounds

As the region's major global financial center, many well-managed, high-quality, regional and global businesses are listed in Hong Kong. Our overweight to Hong Kong does not reflect a positive view on the domestic economy, nor do we view it as a direct proxy for China. We trimmed our position in Hong Kong due to high valuation, but we remain positive toward quality companies such as AIA, CK Hutchison, and Samsonite International, where we have positions. The strategy, however, exited ASM Pacific Technology, the world's largest assembly and packaging equipment supplier for the semiconductor industry, as its valuation reached a fair level.

India Remains a Large Bet Amid Improving Economic Prospects

We remain optimistic about the medium-term prospects for positive change in the Indian economy, but we believe certain stocks/sectors have discounted the news. India is among the portfolio's largest bet, with high-quality holdings balanced between domestic cyclicals and export beneficiaries. Our top relative positions are HDFC Bank, one of India's largest private banks with a well-known retail banking brand and beneficiary of recent demonetisation, and Dr. Reddy's, which has been mentioned above.

Reduced Our Underweight to South Korea

South Korea has been a longstanding underweight; however, over the past few months we have reduced the extent of this relative position as we begin to find compelling investment opportunities.

• For example, we hold a view that the battery issue in Samsung Electronics is a one-off problem instead of a structural concern. We view the improvement of corporate governance at the world's second-largest mobile handset company as another catalyst for Samsung Electronics.

• We also have a position in GS Retail, one of the largest CVS operators in South Korea. The CVS business is attractive in South Korea and has proven to be a good business in Asia over time.

• We also took advantage of recent weakness to build a position in LG Chemical, a South Korean petrochemical company that has expanded its business into electronic vehicle (EV) batteries. The stock has been under pressure with negative news flows from chemical margins to poor communication with investors. We believe that the current share price level has low downside risk and the company is poised to benefit from EV launches. Moreover, its valuation is undemanding.

Holding Traditional Technology Names in Taiwan

We continue to look for new opportunities within Taiwan, and the information technology sector is a key sector. Over the quarter, we maintained our exposure to traditional technology segments such as chips, wireless networking, and components as we believe they will be the beneficiaries of new technology, for example, the Internet of Things and advanced driver assistance systems (ADAS).

• We added Largan Precision, a Taiwanese phone camera maker, on the back of the dual-camera smartphone becoming a secular trend and the rising adoption of multi-camera augmented reality phones. Chinese smartphone original equipment manufacturers have been ramping up dual camera. In our view, the increasing application of lens in 3-D facial recognition for next year will support demand for dual camera. After 2018, the company will ramp up more vehicle lenses for ADAS.

Information Technology Still the Largest Absolute Sector Position

Information technology continues to be our largest absolute sector position and a significant overweight. Tencent, China's dominant social platform, remains our core holding as the outlook for the mobile games business over the next two years remains positive, in our view.

• We continue to add to our position in Alibaba, the largest e-commerce player in China, as we believe it is investing to make the franchise strong in the long run. The company has an asset-light platform model, which is highly cash generative and scalable. We believe monetization will improve as the company gets better at utilizing data, especially on the mobile side.

• We increased our position in Baidu, China's leading search engine, as we expect the search business will recover in growth from a low base. The market also has not taken into account its incremental revenue from the newsfeed business, and artificial intelligence may open up new opportunities and improve Baidu's overall positioning among peers.

Moved Further Underweight to Financials

Financials remains a relative underweight, and we have no exposure to Chinese banks due to our concerns about nonperforming loans and the deterioration of provision coverage. Over the period, we further modestly reduced our exposure to the sector, largely for stock-specific reasons rather than a change in our macro view.

We eliminated our position in BDO Unibank, the Philippines' largest bank by loans and assets. Valuation is looking full after a strong run and priced in strong macro and low credit cost. The bank's return on equity is expected to be somewhat flat, while political concerns are growing. We have trimmed our overweight to the Philippines.

More Overweight to Industrials

In the fourth quarter, the strategy added to its exposure to industrial names such as South Korea's LIG Nex1 and Jardine Strategic and ComfortDelGro, both listed in Singapore.

• We retain the view that ComfortDelGro is one of the best-managed land transport companies in the world.

• We increased our holdings in Jardine Strategic, a position we initiated in the third quarter as the ASEAN-focused conglomerate was trading attractively at a discount to its net asset value. Its Indonesian auto business has strengthened, and its Hong Kong retail business has stabilized while a low vacancy environment continues to prop up its Hong Kong office rental business.

• LIG Nex1, a South Korean defense company, reported weak third-quarter results as expected, and we saw that as an opportunity to add more to our position. We expect the company to post good annual growth this year and in 2018 based on its project trends.