Fund Commentary – April 2019

Fund Commentary – April 2019

Market Environment:

Chinese equities were higher in April on stronger-than-expected Chinese economic data. The modest increases in spending for infrastructure combined with lower reserve requirement ratios (RRRs) and value-added taxes (VATs), successfully improved sentiment, and helped boost economic activity year to date. Chinese corporate earnings remain relatively robust and valuations continue to be some of the most attractive among emerging markets, even after the year-to-date rally in equity markets. We continue to monitor the progress of trade talks, which remain unsettled. Trade conflicts can affect near-term investor sentiment, but have little long-term impact on the types of domestic economy-driven businesses we tend to own.

Performance Contributors and Detractors:

For the month ending April 30, 2019, the Fund returned 2.69%, outperforming its benchmark, the MSCI China All Shares Index, which returned 1.45%. From a sector perspective, the Fund’s holdings in consumer discretionary and financials made the largest contributions to relative performance. The Fund’s real estate holdings, meanwhile, were a detractor during the month.

From a stock perspective, a contributor to performance was insurance provider New China Life Insurance, which benefits from rising rates of insurance adoption in China. As affluence levels continue to rise in China, there is increasing demand for protection-type insurance products, such as riders that protect family wealth in the event of the death of a spouse or the loss of a home. We increasingly see a shift away from consumers using insurance as purely investment-spread vehicles. These trends benefit insurance companies in general because protection-based insurance products tend to have inherently higher margins than policies designed as investment-spread products. We believe New China Life insurance is an up-and-coming player in this space, with the potential to gain market share while benefiting from the positive trends above.

A detractor was information technology (IT) outsourcing and services provider Chinasoft International, whose biggest customer is Huawei Technologies, the telecom equipment and consumer electronics manufacturer. Concerns over a slowdown in Huawei’s operations led to a decline in sentiment toward Chinasoft. Despite near-term concerns about Huawei’s growth prospects, we believe Chinasoft has attractive long-term growth potential, with the ability to grow and diversify its client base over time. We also believe it has the potential to become one of the larger and more substantial IT outsourcing providers in China.


Trade talks between the U.S. and China remain unsettled, but we believe it is in the best interest of both countries to eventually reach a deal. Daily headlines around trade talks tend to have a major impact on sentiment. We expect volatility to continue until a trade deal is reached. The good news is that the services portion of China’s economy has grown larger than its manufacturing portion every year for the past seven years, leaving the economy less impacted by exports. The long-term growth story in China continues to center around how well China can manage its domestic economy.

On the domestic front, Chinese policymakers seem to be making reasonable decisions around various market reforms, as well as in their modest, incremental use of stimulus. Policy initiatives such as the government’s anti-corruption drive, state-owned enterprise reform, supply-side reform and a shift in financing to sectors with lower capital expenditures are all positive signs for the economy. Overall, 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. 

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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