Fund Commentary – January 2019

Fund Commentary – January 2019


In a sharp reversal, in January 2019, Chinese equities posted some of the strongest results in the region as local sentiment improved and recent negative economic results showed signs of stabilizing. Chinese business sentiment has improved as the government has allowed credit to expand and manufacturing data is showing signs that the manufacturing base is holding steady at current levels. Meanwhile, trade negotiations between officials from both the U.S. and China are ongoing. Both sides seem willing to engage in dialogue, which is a positive step forward. But there is currently little clarity or consensus about what a potential resolution might look like. We continue to monitor the progress of trade talks. Trade conflicts can impact near-term investor sentiment, but have little long-term impact on the types of domestically focused, consumer driven businesses we tend to own.


For the month ending January 31, 2019, the Fund returned 10.3%, slightly ahead of its benchmark, the MSCI China All Shares Index, which returned 10.1%. From a sector perspective, the Fund's health care holdings were the largest contributor to performance. Meanwhile, the Fund's consumer discretionary holdings, while generating positive returns, lagged the benchmark and detracted from performance.

From a stock perspective, a top contributor in the month of January was CIFI Holdings (CIFI), a property developer focused on building housing near the outer perimeters of tier one cities, which represent China's largest megacities. While there have been concerns by market participants about a softening housing market, the largest developers are still gaining market share and we believe that some of these top developers still have a long runway for growth. Property development is very much a scale business, where the larger companies have better access to funding and have the ability to gain market share even amid conditions of considerably tighter liquidity. This environment presents difficulties for smaller competitors that may have less access funding. Accordingly, smaller companies could find it challenging to fund land acquisitions that would generate sales in future years.

CIFI has carved out an attractive niche of providing affordable housing on the perimeters of first-tier markets. Increased transportation infrastructure and accessibility to and from the city suburbs to the city centers has made these neighborhoods attractive for commuters. Many homebuyers are willing to travel a bit further for affordable housing, while finding the daily commute between work and home very manageable. As price points in first tier city centers are high, demand for affordable housing around the city perimeters is growing. CIFI is strongly positioned within a healthy segment of the market.

A detractor from performance during the month of January was Shangri-La Asia, an operator of five-star hotels in China. With macro trends in China softening, market participants worried about occupancy rates for luxury hotels, sending Shangri-La Asia's stock price downward during the month. International chains, such as Marriott, Hilton and Hyatt are also expanding aggressively in China, adding to negative sentiment toward the stock. However, we believe growth in the travel industry is a long-term, secular growth trend and there may be room for both regional and international players. We continue to monitor developments in the travel and leisure sector, with an eye toward selecting the most compelling opportunities from the bottom up.


The global macroeconomic environment remains uncertain and many market participants are bracing for more volatile trading environments. We continue to position our portfolio according to our long-term beliefs that China's domestic economy remains healthy, and that there are secular growth opportunities in both China's new and old economy sectors that stand to benefit from the rising levels of affluence among domestic consumers. In China today, for example, growth opportunities are rapidly shifting from coastal areas to inland cities. The development of China's new economy sectors is also framed around a transition to higher value-adding services and technological development.

Over the next year, we believe that China will continue negotiations with the U.S. and provide the concessions needed to repair any damage to consumer sentiment since tariffs on Chinese exports started to be imposed. It remains uncertain whether such concessions will be enough; we remain cautiously optimistic about some resolution as a deal would be in the interest of both sides. Given a confluence of negative headlines already reflected in prices, the risk-reward scenario remains particularly favorable given attractive, high single-digit valuations and an outlook that should increasingly improve.

Source: State Street Bank and Trust Company. Source for index data: MSCI

Past performance is not a guide to future returns. Investment returns are historical and do not guarantee future results. Investment returns reflect changes in net asset value and market price per share during each period and assumes that dividends and capital gains distributions, if any, were reinvested. The net asset value (NAV) percentages are not an indication of the performance of a shareholder›s investment in the Fund, which is based on market price. NAV performance includes the deduction of management fees and other expenses. 

The views and opinions in this commentary were as of the report date, subject to change and may not reflect current views. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund's future investment intent. It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein. The information does not constitute a recommendation to buy or sell any securities mentioned. Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. This and other information is contained in the Fund's annual and semiannual reports, proxy statement and other Fund information, which may be obtained by contacting your financial advisor or reviewing this website.

The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information.

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