Against the backdrop of persistent trade and geopolitical uncertainties, the portfolio has taken on a fairly defensive character while finding opportunities in a few cyclicals with growth prospects. Valuations of these "growth cyclicals" were below their historical averages and looked attractive.

In Greater China, we sought opportunities in companies that are best placed to benefit from import substitution. These were in areas such as industrials, technology, pharmaceuticals and consumer products. A prolonged US-China trade discord can be expected to result in companies in China and the US substituting with imports from other countries.

China remained our largest country position in the quarter and we continued to increase our exposure to businesses with strong online platforms that we believe can continue to expand. These businesses may be approaching a more mature stage of development, and investors may be underestimating their ability to expand earnings.

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We also searched for companies with good secular growth prospects that traded at reasonable valuations. Moreover, we found a number of new mid-cap ideas, mainly in China A shares. We preferred companies operating in industries with better structural growth and those state-owned enterprises with enhanced management incentive programs that are aligned with shareholder interests.

Country-wise, while we increased our relative overweight to China and reduced our underweight to Taiwan, we pared our overweight allocation to India. In Hong Kong, while valuations were lower, we preferred to position ourselves in names less vulnerable to policy risks.

In India, we remained heavily skewed towards privately-owned financials with quality franchises and pared back exposure to more cyclical stocks.

In the developed markets of South Korea, Taiwan, Hong Kong and Singapore, we like companies with global or regional businesses as prospects for growth outside their home markets are better.

From a sector perspective, financials remained our biggest position in absolute terms as we bolstered our existing position in "growth cyclicals." Within consumer staples, our largest relative overweight, we retained our preference for companies that are likely to compound earnings and are poised for further steady growth. In IT, we favored semiconductors and hardware names that are likely to benefit from the memory chip market recovery amid rising demand for artificial intelligence-related applications, cloud gaming, the 5G cycle and new server platforms.

Companies that are boosting their innovation capabilities in areas such as health care, automotive, home appliances, robotics, environment, and other consumer applications are the ones of interest to us. We favour companies that are putting in place improvements by making optimal use of technology in their businesses. We continue to favor companies that are gaining market share and those that will benefit from pricing changes and industry consolidation. We like underappreciated manufacturing businesses with long track records of execution, strong cash flow and high dividend yields. We see value in companies with improving fundamentals due to capital expenditure (capex) discipline.

We Became More Overweight China

In China, we turned more overweight as we found more opportunities on valuation grounds and in companies that we believe can grow market share and compound earnings despite the macroeconomic and trade policy uncertainties.

We continued to add to our positions in businesses with strong online platforms that can continue to expand or those that will benefit from the use of technology in their operations, such as Tencent, and insurers like PICC Property and Casualty, and Ping An Insurance.

We increased our stake in companies that will likely benefit from import substitution as a result of the trade conflict such as Shenzhen Inovance, which produces inverters and controllers and is expanding into factory automation and electric vehicles. We expect this company to gain market share in China's growing industrial automation market.

We initiated a position in TAL Education, a high-quality tutoring provider that generates significant free cash flow and will likely continue to gain share in a highly fragmented market.

We continued to invest in new mid-cap ideas in China A shares. For example, we established a position in Songcheng Performance, one of the better-managed, show-based theme park operators in China, which we view as a beneficiary of domestic travel and leisure growth. We initiated a position in Jiajiayue Group, a food retailer with a focus on fresh products which we view as an earnings compounder in a defensive sector. We think that this fresh food segment will face less pressure from the rapid growth of ecommerce, given that the supply chain is longer and more complicated.

In China, we also favor companies operating in industries with better structural growth such as consumer staples, healthcare and property. We are inclined to invest in companies with enhanced management incentives and these are mostly to be found among state-owned enterprises.

Hong Kong and Taiwan Relative Underweight Reduced

We reduced our underweight in Hong Kong, the worst-performing market in the region during the quarter, by starting a a position in Hong Kong Exchanges & Clearing (HKEX), the largest vertically integrated stock exchange in the region. We think its valuation is reasonable and we view it as being less vulnerable to policy risks than either banks or property stocks, which have cheaper valuations. However, we are looking into HKEX's surprise bid for the London Stock Exchange, given the dilutive nature of the proposed acquisition. Structurally, HKEX will likely continue to benefit from China capital flows due to the cross-boundary investment channel Shanghai-Hong Kong Stock Connect and also the growing derivatives business.

In Taiwan, where we generally hold technology names, we increased our position in Taiwan Semiconductor Manufacturing (TSMC), one of the world's largest contract chipmakers, as the company will likely benefit from the accelerating adoption of 5G, which includes both smartphone and infrastructure chips. TSMC is guiding for higher capital expenditure than last year and in our view will likely benefit from the 5G upgrade cycle in 2020. We like TSMC's strong balance sheet and think the company is well positioned to benefit from the trends of smart cars, artificial intelligence (AI), and 5G in the coming years.

We continue to own companies in Taiwan that benefit from import substitution by Chinese companies such as MediaTek, a fabless semiconductor company that provides chips for wireless communications, and Silergy, which designs and makes a broad range of analog integrated circuits.

We Turned Less Overweight India; Cyclical Exposure Pared

We reduced our relative overweight to India by closing several positions and reducing our exposure to cyclical names as the capital expenditure revival expected prior to the elections failed to materialize and may take a longer time to play out. We eliminated tiremaker Apollo Tyres, which has been hit by the downturn in Europe and by the tougher competition in India. We also cut our position in two private lenders, Axis Bank and ICICI Bank.

We closed our position in engineering and construction firm Larsen and Toubro as we locked in profit. Finally, we sold out of ITC, India's largest cigarette company on concerns that the sector may be facing a tougher regulatory environment under the new government. Tax increases are a recurring concern affecting the company amid already-high cigarette prices and poor volume growth.

We added GRUH Finance to the portfolio, a high-quality rural housing finance company owned by HDFC. Kolkata-based Bandhan Bank is acquiring GRUH Finance, and our position in the latter gave us exposure to Bandhan Bank, a microlending bank that we like, at an effective discount.

We Decreased Our Allocation to Consumer Staples

We decreased�our allocation to consumer staples, our largest sector relative overweight during the quarter, with the elimination of the abovementioned ITC. We also closed our position in Uni-President China, a juice drink producer and instant noodles supplier, on valuation grounds. Moreover, the company's first-half revenue growth continued to disappoint and we see limited upside to this stock without better revenue growth. However, within consumer staples, we established a position in United Spirits, one of India's leading liquor companies. We believe it is poised to improve margins following better cost management, the cleanup of its balance sheet, and cash flow improvement. We think the business is in a position to deliver further steady growth. We also added other consumer staples names, such as the aforementioned Jiajiayue Group. We took the opportunity to increase our holdings in another China A share consumer staples stock, Yixintang Pharmaceutical, following its recent share price decline. The stock fell due to weak second-quarter results brought about by a new one-pharmacist-per-store policy in the southwestern Chinese province of Yunnan, where it dominates the local market. We believe the worst is behind for Yixintang, although it will still need to invest in attracting pharmacists to support its expansion plans. We continue to view Yixintang as a low-beta compounder that will benefit from China's rising health care spending and sector consolidation.

We Decreased Our Overweight to Financials and increased in Industrials and Business Services

We slightly reduced our relative overweight to financials as we trimmed our holdings in the aforementioned Prudential. The unrest in Hong Kong may have weakened the insurer's policy sales. We also cut our stakes in ICICI Bank and Axis Bank as we sought to reduce our exposure to cyclical stocks in India. However, we established due positions in India's GRUH Finance and Hong Kong's HKEX as discussed earlier. We also increased our position in "growth cyclicals" with attractive valuations such as PICC Property and Casualty, the largest property and casualty company in China. Moreover, we added to our position in Ping An following strong underlying performance in the first half of the year.

We turned more overweight in industrials and business services in the third quarter, as we added to our holdings in Shenzhen Inovance which we discussed earlier.

Aside from Shenzhen Inovance, we increased our allocation to CJ Logistics, South Korea's leading parcel services company, which also provides land and maritime transport, cargo handling, and warehouse facilities in Korea and overseas. We view CJ Logistics as a "growth cyclical" with an attractive valuation. We like the fact that management is shifting its focus to profitability from market share growth in the parcel business. In the third quarter, management delivered on higher parcel pricing to offset increases in labor costs and reiterated that it is not looking for any major acquisitions.

We Focused More on Semiconductors, Hardware in IT

IT remained one of our biggest sector allocations in absolute terms, and within it we focused more on semiconductors amid expectations of a recovery in the global memory chip market. Aside from the previously-mentioned TSMC, we increased our exposure to Samsung Electronics, one of the world's biggest memory chipmakers. We believe it is poised to benefit from a DRAM recovery that will be driven by 5G, cloud gaming, and multi-camera smartphone demand. At the end of the second quarter DRAM demand started to pick up and we expect DRAM inventory to decrease.

Within the IT sector, we exited Hangzhou Hikvision, a Chinese maker of video surveillance products and solutions, during the quarter. We viewed Hikvision as a well-managed company with a healthy balance sheet and structural growth potential in areas like high-end camera with artificial intelligence. However, we decided to exit the stock largely due to component shortage concerns as a result of the U.S.-China trade frictions and partly due to environmental, social and governance risk.