Fund Commentary - January 2020

Fund Commentary - January 2020


In January, the U.S. and China signed “phase one” of a trade agreement, which was light on specifics but represented an improvement in rhetoric. Chinese equities experienced fresh volatility later in the month, however, as investor sentiment declined on concerns about the coronavirus. A longer-than-normal incubation period for the virus combined with the mass people movement associated with the Chinese New Year complicated efforts to control the virus early on. Chinese authorities acted decisively, limiting internal travel and controlling the country’s borders while working with world health organizations to control the outbreak. Manufacturing and production disruption as well as the replenishment of inventories was harder to estimate given some restrictions were imposed on workers to return to factories. We expect short-term impacts on China’s economy, but also expect these impacts to be temporary.


For the month ending January 31, 2020, the Fund returned -7.48%, lagging its benchmark, the MSCI China All Shares Index, which returned -3.35%. From a sector perspective, the Fund’s holdings in communication services detracted from relative performance. In contrast, the Fund’s holdings in the energy sector contributed to relative performance.

A detractor among individual stocks was Chinese liquor company Kweichow Moutai. The company’s stock price declined in January after the company announced preliminary earnings that were short of market expectations. While the company had muted projections for 2020, Kweichow Moutai still expects double-digit topline growth ahead. While sentiment was recently weak around the stock, we continue to see Kweichow Moutai as a premier national brand in China with strong brand equity. Kweichow Moutai continues to streamline its distributor network, while conducting more direct sales. We see opportunity for the company to expand margins.

A contributor among individual stocks was e-commerce company As the second-largest e-commerce company in China, has a broad reach and its profitability is improving. Logistics-oriented businesses tend to be capital-intensive in their early years, but with much of’s logistic infrastructure already in place, we expect the business to be less capital-intensive going forward. China has many metropolitan densities and the complexity of making deliveries to most households is high. We believe this complexity creates a competitive moat for an established e-commerce player such as


We expect the coronavirus outbreak to impact China’s economy in the near term. Many local hospital systems are strained and travel has been limited while health officials work to contain the virus. At the same time, we expect these impacts to be somewhat seasonal in nature. Should China’s government decide to introduce stimulus to offset any potential economic slowdown associated with the coronavirus, we believe it has room to do either more fiscal or monetary spending. Prior to the outbreak, Chinese businesses forecasted a strong earnings cycle for 2020. As the impact of the virus dissipates, we have reasons to believe that economic growth may remain healthy. There are still fundamental reasons why the corporate-growth earnings cycle in China can restart as concerns about the virus recede. We expect China’s economy to show signs of recovery in the second half of 2020.
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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