For the year ending 31 December 2020, the Matthews Pacific Tiger Fund returned 30.48%, while its benchmark, the MSCI All Country Asia ex Japan Index, returned 25.36%. For the fourth quarter of the year, the Fund returned 22.03% versus 18.66% for the Index.

Market Environment:

The pandemic created notable disruptions and opportunities in 2020, providing markets and companies with a major accelerant and catalyst for change. The pandemic accelerated the move into areas such as e-commerce, software services and digital platforms into warp speed, creating new opportunities for innovative businesses. Another significant trend is the acceleration of labor reform in India and Indonesia. And finally, we continued to see further deregulation and liberalization of China’s capital markets including greater openness towards foreign investment, which is providing additional liquidity and support for China’s rapidly growing bond and equity markets.

In 2020, corporate earnings across Asia dropped much less than analysts initially feared and we believe that earnings may rebound strongly in 2021. Taiwan and South Korea, for example, contributed significantly to Asia’s growth in 2020. Doing a strong job in containing the pandemic, both economies are also home to companies that are benefiting from the accelerated update in e-commerce and digital services. Another positive trend during the year was companies and management teams’ agility in cutting down costs and reining in capital expenditures. Free cash flow was resilient in the course of 2020.

While small cap stocks slightly outperformed large caps in 2020—the first time we’ve seen that dynamic in the past five years—the impact of the pandemic was disproportionately felt by small and medium-size businesses. As the economic recovery starts to broaden out, small and mid-sized companies may be able to participate more fully in economic growth.

Performance Contributors and Detractors:

During the year, contributors to performance included stock selection in China, Taiwan and South Korea. North Asian economies contained the pandemic relatively faster and companies in these countries responded proactively to the uncertain demand environment. The Fund’s holdings in IT hardware and software, health care and leading consumer brands such as Mediatek, Naver, Wuxi Biologics and China Resources Beer have shown strong core business operation and contributed positively during the year. From the strong equity market, the Fund’s financial holdings in Hong Kong Exchanges & Clearing Ltd. had positive performance too. Coupled with a strong equity market, capital raising activities by mainland Chinese companies have led greater trading volume on the exchange.

On the other hand, the Fund’s relative overweight in India and ASEAN detracted from performance during the year, as these economies took more time to recover from the pandemic and recovery has been more gradual. The Fund’s holdings in the shopping mall operators in Thailand, such as Central Pattana Public Co. Ltd, and the Philippines such as SM Prime Holdings, Inc. were also affected negatively during the year as traffic was restricted to those malls and tenants’ revenue shrunk. Additionally, the impact of the lock down on the asset quality of the banking sector weighed on investors’ sentiment, impacting the Fund’s holdings in India banks, such as HDFC Bank Limited (which we sold during the year), and Indonesian banks, such as PT Bank Central Asia. Our approach continues to maintain exposure to those shopping malls and banks with strong balance sheets as we believe long term structural demand is still intact.

Notable Portfolio Changes:

During this year, we continued to diversify the portfolio to capture secular growth opportunities that we believe can persist in coming years while maintaining focus on domestically oriented growth in Asia. The continued evolution in the business landscape especially in China, and pandemic-induced volatility in the capital markets allowed us to capture newer growth opportunities for the portfolio.  As a result, our weight in consumer discretionary, health care and IT sectors has increased. Meanwhile, the Fund’s weight in financials and consumer staples sectors decreased.

In the fourth quarter, we initiated some new positions, including in Yageo, a Taiwanese listed company that produces computer chips and other electronic components. As a small to mid-cap stock, Yageo appears undervalued relative to its global peers. We also see a strong turnaround story with the company, as its management is focused on new areas of growth and improving its execution. Some of these new positions were funded from capital released from positions like DKSH which we exited during the fourth quarter. The company has taken notable steps to improve cost structure but we believe there may be better growth opportunities elsewhere in the portfolio.

Outlook:

Looking ahead, uncertainty remains in terms of the pace of Asia’s economic recovery. Given the uncertainty of how quickly vaccines can be distributed, how quickly daily patterns may return to normal remain unknown and the strength of the economic recovery in different markets where we invest may not be immediately evident. Valuations for Asia ex-Japan equities are above their historic averages and in some areas of the market, we believe investors have already priced in a high level of anticipated future growth. All of these emphasize the importance of investing with a long-term view.

At the same time, we see many reasons for optimism. There are three important drivers for equity prices—growth, valuation and liquidity. From a growth perspective, Asia is on a path to economic recovery and the sheer size of the consumer base in Asia works in its favor. Valuations for Asia ex-Japan equities rose in 2020, so there is less valuation support for the broader market, but we continue to see pockets of opportunity. Finally, turning to market liquidity, we see good liquidity across Asia. We believe the confluence of these drivers will support medium to long-term growth across many parts of Asia.