Fund Commentary – July 2019

Fund Commentary – July 2019

Market Environment:

After a strong June, Chinese equities were mostly flat in July. Economic data released in July showed stable employment with slightly slower overall growth. Consumption and services, the largest part of China’s economy, remains healthy. Other areas such as manufacturing, investments and exports were down. Investors largely remained on the sidelines in July amid mixed economic data and unresolved trade issues. (Following the end of the reporting period, President Trump proposed adding a 10% tariff on $300 billion of remaining U.S. imports from China on August 1, injecting fresh volatility into markets.) On the plus side, Chinese corporate earnings appear stable, even amid a moderate slowdown in economic activity. Despite renewed volatility, Chinese stocks, especially A-shares, still remain some of the strongest in the region year to date.

Performance Contributors and Detractors:

For the month ending July 31, 2019, the Fund returned -0.40%, slightly trailing its benchmark, the MSCI China All Shares Index, which returned -0.12%. From a sector perspective, the Fund’s holdings in the financials sector detracted from relative performance. In contrast, the Fund’s holdings in the health care and consumer discretionary sectors were the largest contributors to relative performance.

A detractor in the month was 58.com, a provider of online classified ads. One of its major business lines is help-wanted ads for blue-collar workers, such as for restaurant dishwashers and house cleaners. Another business line is ads for residential rental properties, such as rooms for rent, as well as entire apartments. The stock suffered on declining short-term macroeconomic sentiment, but we continue to like the company’s long-term prospects. The company is a dominant player in the classified ads industry and we believe it stands to benefit from a trend of increased classified listings, both for jobs and real estate, via online platforms.

Meanwhile, a contributor among individual stocks was Luxshare Precision Industry, a stock traded in China's domestic A-share market. Luxshare Precision Industry is a handset component maker that is moving into new business areas by focusing on higher value manufacturing opportunities and diversifying its client base. The company demonstrates strong execution and its addressable market continues to expand. This was a new company that we added in recent months and we look forward to monitoring the progress toward its goals. 

Outlook:

Trade talks between the U.S. and China remain unpredictable. We believe it is in the best interest of both sides to reach a deal over the long term. Over the near term, market turbulence could linger. We believe that while trade tensions impact short-term sentiment, they have little impact on China’s long-term growth potential. Growth in China is driven by innovation, rising incomes and reinvestment of savings, which leads to higher potential for consumption.

To date, China’s policymakers have not rolled out significant stimulus. Policymakers have a number of tools at their disposal for monetary and fiscal easing, however, should they decide to use them. Growth in infrastructure spending, for example, is well below historic levels and policymakers could raise spending in areas such as this to support overall growth. We do not expect broad-brush stimulus ahead, but we believe the potential for a modest uptick in stimulus is becoming more likely.

Investing with a long-term view, we step back from the noise and remain focused on the fundamentals that promote growth. 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 to come and look for businesses geared toward those opportunity sets.


Source: Brown Brothers Harriman & Co. 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. Back to Fund Commentaries