Fund Commentary – March 2019

Fund Commentary – March 2019

Market Environment:

Chinese equities posted another solid month in March. While current levels of fiscal and monetary support are very modest and focused in scope, the easing posture among policymakers seems to have improved local sentiment. Chinese corporate earnings remain healthy and we believe valuations look attractive, even after a rally in equity markets. Although economic growth is slowing slightly, recent subtle shifts in policy could help mitigate some near-term risks to the economy, while still supporting personal income growth and spending.

In March, market participants also kept an eye on the imminent inclusion of China’s bond market in the Bloomberg Barclays Global Aggregate Index, which took effect on April 1. China’s bond market is the second-largest in the world, but previously had no representation in global bond indexes. This development should also help further accelerate positive changes to China’s financial reforms—the last major reform on its agenda—and include further reforms on its currency policy and banks.

Performance Contributors and Detractors:

For the month ending March 31, 2019, the Fund returned 3.64%, slightly ahead of its benchmark, the MSCI China All-Shares Index which returned 3.55%. From a sector perspective, the Fund’s real estate, utilities and consumer staples holdings were the largest contributors to relative performance. In contrast, the Fund’s consumer discretionary and information technology holdings detracted from relative performance.

During the month, top-contributing securities included Chinese liquor companies Wuliangye Yibin and Kweichow Moutai. Wuliangye continues to make progress toward its goals of including more premium products within its brand portfolio and Moutai continues to streamline its distributor network, while conducting more direct sales. Efforts by both companies were favored by investors who see increased opportunity for these companies to expand margins.

Meanwhile, a detractor from performance was Galaxy Entertainment Group, a Macau casino holding. While we believe this company has the best property to attract Chinese tourists, its growth has been limited for the near term given a lack of new capacity. We remain constructive on Galaxy Entertainment and believe growth could resume when it completes its expansion plans next year. The status of gaming licenses for certain operators would also bode well for companies in this sector should their bids to renew licenses be granted.


We believe China remains unlikely to roll out large-scale stimulus plans to combat risks of slowing growth. Instead, we have seen targeted efforts to reduce the tax burden across both businesses and consumers in China thus far this year. China’s personal income tax and value-added tax (VAT) reductions improve consumer spending power and sentiment and raise profitability for corporations. We look forward to China’s further efforts to lower taxes across a wider range of industries.

Consumer sentiment in China also remains better than expected. Worries that surfaced in the middle of last year over a weaker labor market, linked to potentially large job losses in the manufacturing sector, proved to be largely unfounded by the end of the first quarter of this year. Following the Chinese New Year period in February, an improved property market, led by lower purchase restrictions and mortgage rates in a handful of cities, also further boosted sentiment. We believe that these positive trends will continue to improve the current market environment. 

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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