Fund Commentary – May 2019

Fund Commentary – May 2019

Market Environment:

Chinese equities suffered in May as trade negotiations between the U.S. and China experienced fresh setbacks. Rhetoric escalated on both sides, bringing significant uncertainty as to the timing of a potential resolution. Implications of higher tariffs on a broad set of consumer goods and the potential for disruption to supply chains have pressured global equity markets, emerging and developed alike. Investors feared that the chances of a resolution in the short term were fading. Market participants will keep an eye on U.S. President Donald Trump and Chinese President Xi Jinping’s meeting at the G20 summit in late June for signs of renewed negotiations.

In the meantime, investors remained worried about a possible slowdown of the world’s largest economies and the potential knock-on effects to company earnings. If there is a small silver lining, it is that Chinese policymakers have a number of policy tools for stimulating growth. To date, Chinese policymakers have only employed modest, incremental stimulus. However, Chinese policymakers have signaled that they stand ready to further stimulate their economy should the need arise—which could potentially minimize the tail risk of a meaningful negative economic shock to China.

Performance Contributors and Detractors:

For the month ending May 31, 2019, the Fund returned –11.98%, underperforming its benchmark, the MSCI China All Shares Index, which returned –11.51%. From a sector perspective, the Fund’s holdings in the industrials and communication services sectors were the largest detractors to relative performance. Meanwhile, the Fund’s real estate and health care holdings were relative contributors in the month.

A detractor among individual stocks was Galaxy Entertainment Group, a Macau casino holding. Galaxy’s stock price struggled during the first half of 2019, reflecting weak near-term growth stemming from lack of new capacity. Galaxy also faces increased, but potentially short-lived, competition from new gaming destinations such as Cambodia and the Philippines. On a positive note, we believe Galaxy has the best property to attract Chinese tourists. We remain constructive on the holding and continue to monitor the company’s progress toward its goals. Growth could resume when Galaxy completes its expansion plans next year.

A contributor to relative performance was AIA Group, an insurance provider serving regional insurance markets in Asia, including Hong Kong, Thailand, Singapore and China. AIA sells premium insurance products in a handful of Chinese provinces, as insurance licensing requirements can vary from province to province. Looking ahead, we expect the company’s footprint in mainland China to expand, with distribution in more provinces being added over time, creating an attractive trajectory for growth. The company benefits from rising insurance adoption in China and a well-established regional brand.


While trade conflicts dominate the news, China today relies mostly on internal sources for growth. This can be seen from its services economy, which now contributes more than half of its GDP. As a result, the country no longer relies on trade as a source of growth and has other ways to spur domestic consumption and demand. While China is not shielded completely from external forces, we believe it will be able to weather most of the negative implications of global politics. Still, a full-blown trade war would be detrimental not only to the U.S. and China, but also to the global economy. Accordingly, we believe it is in the interest of policymakers in both countries to eventually reach a deal.

Over the short term, we may see potential supply chain disruptions as local businesses react to changes, given political uncertainties and increased market volatility arising from the trade conflicts. We remain optimistic on the longer term opportunity set in China, however, and are focused on investing in growth opportunities that benefit from the rise of China’s domestic economy over the next decade. Overall, we continue to invest according to our long-term beliefs that China's domestic economy remains healthy, and that there are secular growth opportunities in China's new and old economy sectors that stand to benefit from 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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