Fund Commentary - December 2019

Fund Commentary - December 2019


Chinese equities were strong performers in December. Protests in Hong Kong continued but at a lesser intensity and trade negotiations narrowed to focus on specific, more-achievable objectives—the result of which was a “phase one” agreement. Markets began pricing in a positive trade outcome early in December, which ultimately resulted in a strong rally in China. Going into 2020, the U.S. is expected to sign the trade agreement sometime in mid-January. Chinese corporate earnings are expected to lead Asia and EM with growth in the mid-teens. Government policy should remain supportive, although not outright stimulative, in an effort to maintain steady growth, improve household income and continue economic rebalancing in favor of domestic consumption and services.


For the month ending December 31, 2019, the Fund returned 8.43%, slightly ahead of its benchmark, the MSCI China All Shares Index, which returned 8.25%. From a sector perspective, the Fund’s holdings in the health care sector and underweight in the utilities sector contributed to relative performance. In contrast, the Fund’s holdings in the financials and real estate sectors detracted from relative performance.

A contributor to relative performance was Anhui Conch Cement, a cement producer. The company continues to benefit from a trend of consolidation among cement producers in China. The consolidation has enabled Anhui to raise prices. We see sustainable high levels of gross profits per ton for the company. The market has become more optimistic after the company’s recent performance, giving the stock price a boost. Anhui is the largest producer in the cement space and benefits from economies of scale.

A slight detractor from relative performance among individual stocks was AIA Group, a life insurance company serving China as well as broader Asia. The weakness in stock price may have been related to the Hong Kong protests, as many Chinese consumers go across the border to Hong Kong to purchase insurance, which is a substantial part of the company’s revenues. We think the decline in sales from this segment of the business is temporary. As worries and concerns with the Hong Kong protests eventually subside, business should recover. AIA also has considerable growth opportunities in mainland China, as it currently only has presence in a couple of cities and has ample room to expand.


We continue to see value in the Hong Kong market. The Hong Kong market tends to be more impacted by foreign investor sentiment, which was weak through much of 2019. While foreign sentiment improved in the fourth quarter on easing trade tensions, valuations remain lower in Hong Kong than in China’s domestic markets. We look for opportunities across all markets, reflecting the Fund’s all-share philosophy. Domestic investor sentiment was already positive, creating a favorable backdrop for continued potential gains. As before, we don’t expect significant government stimulus ahead for China’s economy in the absence of any unexpected financial shocks. Consumer spending in China’s less-developed urban centers, often known as lower tier cities, remains strong and we are optimistic about the growth potential of China’s equity markets over the long term.
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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