Fund Commentary – October 2019

Fund Commentary – October 2019


Chinese equities moved higher in October as positive sentiment surrounding trade issues nudged investors off the sidelines. Investor attention pivoted back to the economy and company fundamentals. Stock price valuations in aggregate were hovering around their long-term averages but remained attractively priced. Corporate earnings were stable, if a bit tepid. Next year consensus earnings are higher. Economic growth remains healthy, although slightly slower than earlier years. We believe China's policymakers feel comfortable with the pace of domestic growth, so we don't expect major stimulus ahead. Fiscal stimulus year to date, in the form of VAT and income tax cuts, has been highly targeted and incremental. In our view, any additional stimulus would likely follow a similar pattern—modest in scale and surgical in execution. Meanwhile, the severity of protests in Hong Kong eased a bit in October, but picked up again in November, following the reporting period.


For the month ending October 31, 2019, the Fund returned 5.60%, outperforming its benchmark, the MSCI China All Shares Index, which returned 3.69%. From a sector perspective, the Fund's holdings in the communication services and consumer discretionary sectors contributed to relative performance. In contrast, the Fund's holdings in the financials and consumer staples sectors detracted from relative performance.

A contributor among individual stocks was e-commerce and logistics company We believed in the company's prospects even as was losing money because we felt there was value in the logistics business. reports it can reach most of China's population in under 24 hours. That is a remarkable capability because China has a lot of metropolitan densities and the complexity of making deliveries to most households is high. We are finally seeing signs of a diminished logistics drag, particularly because the company has said it doesn't need to invest any more. Profitability has room to improve. By way of comparison, UPS has a much higher market cap on a much smaller population base, so we believe has room to grow its stock price over time.

A detractor was information technology (IT) outsourcing and services provider Chinasoft, whose biggest customer is Huawei, 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.


Looking ahead, political rhetoric surrounding U.S.-China trade tensions has improved. We are increasingly optimistic about the prospects for a gradual de-escalation of trade tensions. Should a rollback of tariffs occur, it would be positive for investor sentiment. At the same time, trade negotiations remain fluid. The timing and terms of a potential trade deal remain unknown.

China has already pivoted to a services-and-consumption-led economy. Net exports have dipped below 1% of gross domestic product, so China has more incentive to focus on its own long-term economic growth than short-term trade tensions. Increasingly, business owners in China we have spoken with see some upside to the trade tensions. Recognizing that they are overly reliant on foreign technology, China's business community and policymakers are increasingly focused on developing their own domestic supply chains. China is gradually substituting foreign technology with domestic technology, which would help support the country's long-term economic progress.

We continue to follow the spending power of China's middle class when researching new investment ideas. Increasingly, China's emerging middle-class consumers reside in less-developed urban centers. Everything from e-commerce to health care to restaurants and real estate is likely to be in higher demand as more consumers enter the middle class.

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.

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