Fund Commentary - February 2020

Fund Commentary - February 2020


Chinese equities were flat in February but held up better than other parts of Asia. The slowdown in the percentage rise of new virus cases along with comprehensive policy action helped stabilize sentiment within Chinese markets, especially A-shares. Chinese authorities acted decisively, limiting internal travel and controlling the borders while working with world health organizations to control the outbreak. In addition, policy actions meant to assist small and medium-size enterprises were implemented, including an increase in loan quotas, a lowering of borrowing rates, a delay in loan repayments and VAT tax relief. Nevertheless, a temporary downturn in economic activity is inevitable—driven by the cancellation of travel plans by incoming and outbound tourists along with severely diminished consumer activity.


For the month ending February 29, 2020, the Fund returned 5.72%, outpacing its benchmark, the MSCI China All Shares Index, which returned 0.09%. From a sector perspective, the Fund’s holdings in financials and real estate contributed to relative performance. In contrast, the Fund’s holdings in the industrials sector were neutral to relative performance.


A contributor among individual stocks was NAURA, a leading domestic manufacturer of semiconductor equipment that sells to a diverse range of clients, including foundries and LED manufacturers. The company benefited from the trend toward its clients looking for more-local supply chain providers. With a relatively small market share, the company appeared to have an opportunity to ramp up quickly and an ability to scale up.

A slight detractor among individual stocks was Momo, a platform for live-streaming entertainment. The Fund’s small-cap, U.S.-listed ADR exposure saw a negative impact in February. We continue to like Momo’s long-term prospects. In addition to its live-streaming platform, the company is diversifying into subscription-based services, such as a dating app and a dating website.


Manufacturing and production disruption was substantial and analysts now expect a contraction in economic activity in the first quarter with potential negative effects lingering through much of the second quarter. Most analysts predicted an economic hit to the region, but many agreed that the effects are likely to be temporary. The Chinese policy response to a potential slowdown in economic activity was swift and broad-based although not heavy-handed. Investors speculated that the U.S. will follow with a cut in the federal funds rate and that a synchronized accommodative response including Europe and Japan is possible.


We expect business activity in China to slowly resume in the second quarter and for an economic recovery to continue through the second half of calendar-year 2020. While there was a negative short-term impact on corporate earnings, we remain positive in our outlook for Chinese earnings over the long term. In the meantime, earnings for domestically listed Chinese stocks were resilient leading into the rest of the year. The coronavirus may be an event that delays the realization of future earnings but as China returns to normal, we believe it will be on stronger footing to withstand any negative impact felt from global sources.

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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