The Matthews Asia Sustainable Future Fund was launched on 21 July 2022.

Market Environment:

There were two key developments during the first six months of the year. Firstly, the market has been surprised by the persistence of higher inflation and, as a result, peak interest rate expectations in the western world have been steadily revised up. Secondly, there was the market’s excitement about the potential of artificial intelligence (AI), with the release of very successful, large language and stable diffusion models and blowout quarterly results and guidance from NVIDIA, a key player in the space, which together triggered a reassessment of the growth prospects of large tech companies. This led to a very top-heavy performance of equity markets, in the U.S. in particular.

During the period, the relative attractiveness of Asian markets with low inflation came to the fore, such as South Korea and Taiwan. Some currencies in the region also did well against the U.S. dollar, including the Indonesian rupiah and the Philippine peso, while the Malaysian ringgit and the Chinese renminbi were among the biggest depreciators against the greenback.

Taiwan, South Korea and Indonesia were the best-performing markets in the region in the first half, according to the Fund’s benchmark, the MSCI All Country Asia ex Japan Index, while Malaysia, Thailand and China were the worst performers. From a sector perspective, IT, energy and communication services were the best performers while utilities, real estate and health care were the weakest.

Performance Contributors and Detractors: 

From a country perspective, stock selection in South Korea and India were the biggest contributors to the Fund’s relative performance in the first half. On the other hand, an overweight and stock selection in China was the biggest detractor amid negative sentiment over the country’s uneven recovery and geopolitical tensions with the U.S.

From a sector perspective, stock selection in financials was the biggest contributor, followed by stock selections in real estate and health care. In contrast, our mild overweight and stock selection in consumer staples and underweight and selection in communication services were the biggest detractors.

From a stock perspective, Ecopro BM, a South-Korea-based manufacturer of high-nickel cathode materials for renewable batteries, was the biggest contributor to relative and absolute performance in the first half as the company benefited from strong order growth from key customers, particularly in the U.S.

Shriram Finance, an India-based auto and consumer finance services provider, was also a strong contributor as the outlook for both loan growth and margins for non-banking financial companies continued to improve with the bulk of interest rate-hikes likely behind us.

On the flip side, our Chinese or China-exposed holdings such as Full Truck Alliance, a Chinese freight marketplace operator, and JD Health, a leading Chinese online pharmacy company, detracted as the market worried about the slow pace of the Chinese economic recovery. We remain positive about the long-term prospects of these companies and our base case remains a steady, not spectacular, recovery of China’s economy over the coming quarters.

Notable Portfolio Changes: 

In the second quarter, we didn’t initiate any new holdings. We exited our position in Taiwan Semiconductor Manufacturing Co. (TSMC) as we found more attractive opportunities elsewhere in the Taiwan technology supply chain.

Outlook: 

The U.S. Fed’s interest rate-strategy and the market’s expectation of its evolution have been the most important variables impacting the performance of markets over the last few quarters. With the Fed seemingly coming close to the end of its rate-hiking cycle, the focus will now shift to assessing the cumulate impact of all the hikes on economic growth prospects over the coming quarters.

Like during the first half, our focus in the second half of 2023 will be on assessing how China’s economic recovery and growth prospects play out and how they might affect the dynamics of other Asian markets. Russia’s invasion of Ukraine and its effect on energy prices—alongside OPEC’s (Organization of the Petroleum Exporting Countries) persistent efforts to keep prices high—will also need ongoing, careful monitoring although to a lesser extent than in 2022.

Over the coming years, we expect the gross domestic product (GDP) growth-differential between Asian emerging markets and developed markets to improve. This development, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.

Finally, since our inception in July 2022, we have viewed sustainability investing as a synonym for long-term investing. Our approach focuses on investing in companies that are well-positioned to embrace global, multidecadal trends, including addressing critical challenges like climate change and inclusive development. These companies also often tend to be good in identifying and proactively addressing long-terms risk to their businesses. Asian markets, we believe, are key destination for sustainable investment themes that offer attractive opportunities for alpha generation.