Monthly commentary -October 2021

Monthly commentary -October 2021

MARKET ENVIRONMENT

 
After a severe sell off in the third quarter, Chinese equities were a bright spot in October despite slower macro-economic indicators. China's regulatory announcements took a pause, allowing for several large platform companies within the communication services and consumer discretionary sectors to rebound. However, lingering worries about Chinese economic growth caused by restrictive liquidity for its real estate sector, supply side disruptions as well as isolated, COVID-related lockdowns dampened sentiment towards the end of the month. Consumer-oriented stocks, especially within the consumer discretionary, consumer staples and communication services sectors were higher in the month, partially recovering year-to-date losses. Meanwhile, the real estate and energy sectors lagged as China Evergrande Group contagion worries continued and the publicized electricity shortages after the government's pressure for restrictions of energy production to reduce carbon output contributed to ongoing headwinds. 

PERFORMANCE, CONTRIBUTORS AND DETRACTORS

For the month ending October 31, 2021, the Fund returned 3.23%, while its benchmark, the MSCI China All Shares Index, returned 2.78%. From a sector perspective, the Fund's holdings in information technology and industrials were the top contributors to relative performance. On the other hand, the Fund's holdings in financials and communication services detracted from relative performance.

Among individual holdings, e-commerce company JD.com was a top contributor to performance. JD.com's stock price gained ground in October after being weighed down earlier in the year by market concerns stemming from China's regulatory announcements directed at large internet platforms. Despite the uncertain regulatory backdrop, JD.com reported strong second quarter earnings late in August, which boosted market sentiment toward the company.

A detractor among individual stocks was Times China Holdings, a southern China focused property developer which experienced weak performance due to a continued tighter policy environment. We believe that this presents the opportunity for market consolidation over the longer term, and that leading regional players such as Times China should be able to grow market share under these conditions given their strong balance sheets. Real estate opportunities in China are also attractively valued and may offer high dividend yields making the risk reward still favorable in our view.

OUTLOOK

While market concerns of increased regulatory scrutiny may persist over the near term, we expect stock prices may be less influenced by macro forces of synchronized recovery, regulatory oversight and inflation fears and more influenced by company fundamentals and secular growth. In fact, we believe that company fundamentals and attractive valuations can overcome the headwinds of negative headlines and rhetoric. Given the weaker performance of some sectors this year, valuations in China are quite attractive in a global context. We remain focused on the longer-term fundamentals of the domestic growth engine and believe there are many opportunities in China that stand to benefit from the country's efforts at increased domestic self-sufficiency across a myriad of industries. Among the most attractive themes from a secular growth perspective include technology upgrades, health and wellness trends, and services that enhance quality of life and premium consumer goods.

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