Fund Commentary – June 2019

Fund Commentary – June 2019

Market Environment:

Following an uptick in volatility in May, Chinese equities regained a bit of ground in June as trade conflicts seemed to recede. During the G-20 Summit, the tone of the dialogue between U.S. President Donald Trump and Chinese President Xi Jinping notably improved. Though negotiations provided few details, they likely represented the best outcome that the market could expect. Mindful of how fluid trade talks tend to be, we believe it is possible the upcoming 2020 U.S. presidential elections could put additional pressure on President Trump to negotiate.

While China’s policymakers have not yet rolled out significant stimulus, market participants seemed reassured by incremental shifts in policy support for economic growth. These efforts include mild easing in credit policy, accommodative monetary policy and a fiscal policy that includes consumer-friendly tax cuts. Chinese corporate earnings remain relatively robust and valuations continue to be some of the most attractive within emerging markets. While the Chinese economy is slowing slightly, the government’s easing posture could help to mitigate some tail risks in the near term.

Performance Contributors and Detractors:

For the month ending June 30, 2019, the Fund returned 9.13%, outperforming its benchmark, the MSCI China All Shares Index, which returned 7.21%. From a sector perspective, the Fund’s holdings in the financials and consumer staples sectors were the largest contributors to relative performance. The Fund’s information technology and health care holdings, meanwhile, detracted mildly from relative performance in the month.

A contributor among individual stocks was China International Travel Services, an operator of duty-free stores. With a dominant market position in duty-free stores in China, the company has been well-positioned to take advantage of several secular trends, including increased outbound Chinese travel, rising incomes and rising luxury sales. Consumers who used to make duty-free purchases abroad can now make them at home. The company’s focus on China’s domestic consumers provides attractive growth potential and we believe the company has demonstrated strong execution on its marketing plans.

A detractor in the month was Focus Media Information Technology, one of the largest outdoor advertising companies in China. With access to hundreds of thousands of billboards and digital screens, Focus Media can easily deploy large-scale ad campaigns in China. However, owing to softness in the general economy, advertising spending has slowed, hurting recent earnings and sending the stock price lower during the reporting period. Despite short-term weakness in its stock price, we continue to like the company’s long-term prospects. We believe it enjoys a strong competitive and dominant position and remains well-positioned for future growth.


We are incrementally more positive in our outlook for China. Skepticism around trade aside, Chinese corporate earnings continue to be among the strongest in emerging markets, albeit with a moderate slowdown in economic activity in China. Should the Chinese economy slow further, most market watchers expect Chinese policymakers to act swiftly to maintain economic stability.

We continue to find a lot of value in the current market, especially given frequent shifts in sentiment related to daily headlines. Investing with a long-term view, we ignore the noise and focus on the fundamentals that promote growth. We pay particular attention to company earnings, as well as secular trends we see on the ground.

Amid the current news cycle, it is easy for investors to lose sight of the transformation that is taking place among China’s enormous middle class. Income growth has expanded rapidly from the eastern seaboard of China to the country’s vast interior. We expect consumers in less-developed urban centers to drive China’s economic growth for many years and look for businesses geared toward those opportunity sets.

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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