A focus on Asia—and providing compelling investment solutions for our clients—is what we believe distinguishes us among investment managers. Our insights into investment opportunities and risks are backed by proprietary research, a collaborative culture and 30 years of experience.
The Fund seeks to achieve long-term capital appreciation while investing in companies that contribute to a sustainable future.
Sustainability
The Fund has sustainable investment as its objective within the meaning of Article 9 of SFDR. In managing the Fund, the Investment Manager will apply its ESG investment guidelines further described in “General Information Relating To Sustainability” in the main part of the Prospectus.
Strategy
The Fund seeks to achieve its investment objective by investing, directly or indirectly, primarily (i.e., at least 65% of its net assets) in equities of companies located in, or with substantial ties to, the Asia ex Japan region that the Investment Manager believes contribute positively to one or more of its sustainability focus areas. On an ancillary basis, the Fund may invest in other permitted assets on a worldwide basis. For the purpose of this policy, the Asia ex Japan region consists of all countries and markets in Asia excluding Japan, but including all other developed, emerging and frontier countries and markets in Asia. The Fund seeks to invest primarily in companies that the Investment Manager believes, based on its analysis, meet the
following environmental, social and governance ("ESG") standards: (1) they do not cause significant environmental or social harm; (2) they have good governance practices; and (3) they contribute to a sustainable future. In evaluating whether a company meets these ESG standards, the Investment Manager focuses on a company's contribution or potential future
contribution to positive ESG outcomes based on a variety of criteria, which may include some or all of the following: climate change mitigation and adaptation, clean environment, circular economy, or sustainable production and consumption; health and well-being, human capital development, inclusive development or enablement of sustainable development; and/or good
governance practices that demonstrate a strong commitment to integration of ESG principles.
The Fund seeks to achieve long-term capital appreciation while investing in companies that contribute to a sustainable future.
Strategy
The Fund seeks to achieve its investment objective by investing, directly or indirectly, primarily (i.e., at least 65% of its net assets) in equities of companies located in, or with substantial ties to, the Asia ex Japan region that the Investment Manager believes contribute positively to one or more of its sustainability focus areas. On an ancillary basis, the Fund may invest in other permitted assets on a worldwide basis. For the purpose of this policy, the Asia ex Japan region consists of all countries and markets in Asia excluding Japan, but including all other developed, emerging and frontier countries and markets in Asia. The Fund seeks to invest primarily in companies that the Investment Manager believes, based on its analysis, meet the
following environmental, social and governance ("ESG") standards: (1) they do not cause significant environmental or social harm; (2) they have good governance practices; and (3) they contribute to a sustainable future. In evaluating whether a company meets these ESG standards, the Investment Manager focuses on a company's contribution or potential future
contribution to positive ESG outcomes based on a variety of criteria, which may include some or all of the following: climate change mitigation and adaptation, clean environment, circular economy, or sustainable production and consumption; health and well-being, human capital development, inclusive development or enablement of sustainable development; and/or good
governance practices that demonstrate a strong commitment to integration of ESG principles.
Risks
The value of an investment in the Fund can go down as well as up and possible loss of principal is a risk of investing. Investments in international, emerging and frontier market securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation, which may adversely affect the value of the Fund's assets. The Fund invests in holdings denominated in foreign currencies, and is exposed to the risk that the value of the foreign currency will increase or decrease. The Fund invests primarily in equity securities, which may result in increased volatility. The Investment Manager's consideration of ESG factors in making its investment decisions materially impact the investment performance of the Fund. These and other risks associated with investing in the Fund can be found in the Prospectus.
These and other risks associated with investing in the Fund can be found in the prospectus.
Performance
Monthly
Quarterly
Calendar Year
Rolling 12 Month Returns
As of 31/03/2024
Annualized Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Asia Sustainable Future Fund (USD)
1.19%
1.70%
1.70%
3.25%
n.a.
n.a.
n.a.
1.06%
21/07/2022
MSCI All Country Asia ex Japan Index (USD)
2.58%
2.44%
2.44%
4.36%
n.a.
n.a.
n.a.
3.27%
Matthews Asia Sustainable Future Fund (GBP)
1.16%
2.24%
2.24%
0.95%
n.a.
n.a.
n.a.
-2.38%
21/07/2022
MSCI All Country Asia ex Japan Index (GBP)
2.72%
3.38%
3.38%
2.15%
n.a.
n.a.
n.a.
-0.07%
As of 31/03/2024
Annualized Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Asia Sustainable Future Fund (USD)
1.19%
1.70%
1.70%
3.25%
n.a.
n.a.
n.a.
1.06%
21/07/2022
MSCI All Country Asia ex Japan Index (USD)
2.58%
2.44%
2.44%
4.36%
n.a.
n.a.
n.a.
3.27%
Matthews Asia Sustainable Future Fund (GBP)
1.16%
2.24%
2.24%
0.95%
n.a.
n.a.
n.a.
-2.38%
21/07/2022
MSCI All Country Asia ex Japan Index (GBP)
2.72%
3.38%
3.38%
2.15%
n.a.
n.a.
n.a.
-0.07%
For the years ended December 31st
Name
2023
2022
2021
2020
2019
Matthews Asia Sustainable Future Fund (USD)
3.84%
n.a.
n.a.
n.a.
n.a.
MSCI All Country Asia ex Japan Index (USD)
6.34%
n.a.
n.a.
n.a.
n.a.
Matthews Asia Sustainable Future Fund (GBP)
-1.78%
n.a.
n.a.
n.a.
n.a.
MSCI All Country Asia ex Japan Index (GBP)
0.34%
n.a.
n.a.
n.a.
n.a.
For the period ended 31/03/2024
Name
2024
2023
2022
2021
2020
Inception Date
Matthews Asia Sustainable Future Fund (USD)
3.25%
n.a.
n.a.
n.a.
n.a.
21/07/2022
MSCI All Country Asia ex Japan Index (USD)
4.36%
n.a.
n.a.
n.a.
n.a.
Matthews Asia Sustainable Future Fund (GBP)
0.95%
n.a.
n.a.
n.a.
n.a.
21/07/2022
MSCI All Country Asia ex Japan Index (GBP)
2.15%
n.a.
n.a.
n.a.
n.a.
Source: Brown Brothers Harriman (Luxembourg) S.C.A.
All returns over 1 year are annualized
Since inception performance for share classes with less than one year of history represents actual performance, not annualised. In addition, for share classes less than a year old, Year to Date Return is calculated since inception. Where no past performance is shown there was insufficient data available in that year to provide performance.
Performance details provided are based on a NAV-to-NAV basis with any dividends reinvested, and are net of management fees and other expenses. Performance data has been calculated in the respective currencies stated above, including ongoing charges and excluding subscription fee and redemption fee you might have to pay.
All performance quoted represents past performance and is not indicative of future performance. Investors may not get back the full amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of currency exchange fluctuations that may cause a loss of principal.
Additional performance, attribution, liquidity, value at risk (VaR), security classification and holdings information is available on request for certain time periods.
Top 10 holdings may combine more than one security from the same issuer and related depositary receipts. Source: Brown Brothers Harriman (Luxembourg) S.C.A
Portfolio Breakdown (%)
(as of 31/03/2024)
Sector Allocation
Country Allocation
Market Cap Exposure
Sector
Fund
Benchmark
Difference
Information Technology
30.8
27.4
3.4
Industrials
18.9
7.7
11.2
Financials
15.4
20.2
-4.8
Consumer Discretionary
10.1
13.5
-3.4
Communication Services
6.4
9.1
-2.7
Health Care
6.1
3.6
2.5
Real Estate
6.1
2.6
3.5
Consumer Staples
4.5
4.4
0.1
Materials
1.1
4.7
-3.6
Energy
0.0
4.0
-4.0
Utilities
0.0
2.7
-2.7
Cash and Other Assets, Less Liabilities
0.7
0.0
0.7
Sector data based on MSCI’s revised Global Industry Classification Standards. For more details, visit www.msci.com.
Country
Fund
Benchmark
Difference
China/Hong Kong
44.7
34.1
10.6
India
23.0
20.6
2.4
Taiwan
11.8
20.4
-8.6
South Korea
10.4
14.9
-4.5
United States
6.1
0.0
6.1
Vietnam
2.5
0.0
2.5
Bangladesh
0.8
0.0
0.8
Singapore
0.0
3.6
-3.6
Indonesia
0.0
2.2
-2.2
Thailand
0.0
1.8
-1.8
Malaysia
0.0
1.6
-1.6
Philippines
0.0
0.7
-0.7
Macau
0.0
0.2
-0.2
Cash and Other Assets, Less Liabilities
0.7
0.0
0.7
Not all countries are included in the benchmark index(es).
Equity market cap of issuer
Fund
Benchmark
Difference
Mega Cap (over $25B)
23.4
60.4
-37.0
Large Cap ($10B-$25B)
20.0
21.0
-1.0
Mid Cap ($3B-$10B)
32.3
17.7
14.6
Small Cap (under $3B)
23.6
0.9
22.7
Cash and Other Assets, Less Liabilities
0.7
0.0
0.7
Source: FactSet Research Systems unless otherwise noted. Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.
ESG Characteristics
(as of 31/03/2024)
Business Involvement
Sustainability Attributes
Name
Fund
Benchmark
Difference
Controversial Weapons
Fund Coverage: 96%Benchmark Coverage: 100%
0.0
0.5
-0.5
Tobacco
Fund Coverage: 96%Benchmark Coverage: 100%
0.0
0.4
-0.4
Alcohol
Fund Coverage: 96%Benchmark Coverage: 100%
0.0
0.8
-0.8
Gambling
Fund Coverage: 96%Benchmark Coverage: 100%
0.0
0.4
-0.4
Name
Fund
Benchmark
Difference
UN Global Compact Violators
Fund Coverage: 100%Benchmark Coverage: 100%
0.0
0.8
-0.8
Board Diversity
Fund Coverage: 100%Benchmark Coverage: 100%
22.3
18.1
4.2
Board Diversity: Represents the weighted average ratio of female board members in investee companies. Tobacco: Represents companies that generate more than 5% of revenue from tobacco manufacturing exposure to or production or that generate more than 50% of revenue from tobacco retail. UN Global Compact Violators: Represents companies that have been assessed as failing to comply with the 10 United Nations Global Compact Principles by ISS-ESG Norms-Based Research. Different ESG research providers may come to different conclusions on the severity of the violation. Alcohol: Represents companies that generate revenue from alcohol manufacturing or production. Gambling: Represents companies that generate more than 50% of revenue from gambling. Controversial weapons include companies with involvement in the following: anti-personnel mines; biological and chemical weapons; cluster weapons; depleted uranium; nuclear weapons and white phosphorus. A company is excluded if it is directly involved in the production, selling and/or distribution of (parts of) controversial weapons and this involvement concerns the core weapon system, or components/services of the core weapon system that are tailor-made and essential for the lethal use of the weapon.
Fund Coverage: 100%; Benchmark Coverage: 99% as of 31/03/2024
GHG Intensity: Represents the normalized portfolio’s total weighted average (scope 1 + scope 2) carbon emissions intensity, using the most recently available data (emissions data from 2020, 2021). Carbon intensity represents the issuer’s total carbon emissions per EUR million of revenue (tCO2e divided by EUR million in revenue).
Source: Sourced from ISS ESG. Where not covered by external data providers, we have tried to source these data points.
Sustainability-related Disclosures
This Fund
Yes
No
Complies with Article 9 of SFDR
Investment process integrates ESG factors and sustainability risks based on proprietary and third-party research
Applies norms- and activity-based exclusions
Promotes environmental and social characteristics
Has a sustainable investment objective
Conducts engagement
Exercises Voting Rights
Investors should not invest in the Fund solely based on the information in this material alone. Please refer to the Prospectus for further details of the Fund’s investment objective and risk factors.
Vivek Tanneeru is a Portfolio Manager at Matthews and manages the firm’s Emerging Markets Sustainable Future, Emerging Markets Small Companies, Emerging Markets Discovery, Asia Small Companies and Asia Sustainable Future Strategies. Prior to joining Matthews in 2011, Vivek was an Investment Manager on the Global Emerging Markets team of Pictet Asset Management in London. While at Pictet, he also worked on the firm’s Global Equities team, managing Japan and Asia ex-Japan markets. Before earning his MBA from the London Business School in 2006, Vivek was a Business Systems Officer at The World Bank and served as a Consultant at Arthur Andersen Business Consulting and Citicorp Infotech Industries. He interned at Generation Investment Management while studying for his MBA Vivek received his Master’s in Finance from the Birla Institute of Technology & Science in India. He is fluent in Hindi and Telugu.
Inbok Song is a Portfolio Manager at Matthews and manages the firm’s Pacific Tiger and Asia ex Japan Total Return Equity Strategies and co-manages the Emerging Markets Sustainable Future and Asia Innovators Strategies. Prior to rejoining Matthews in 2019, Inbok spent three years at Seafarer Capital Partners as a portfolio manager, the firm’s Director of Research and chief data scientist. Previously she was at Thornburg Investment Management as an associate portfolio manager. From 2007 to 2015, she was at Matthews, most recently as a portfolio manager. From 2005 to 2006, Inbok served as an Analyst and Technology Specialist at T. Stone Corp., a private equity firm in Seoul, South Korea. From 2004 to 2005, she was a research engineer for Samsung SDI in Seoul. Inbok received both a B.A. and Masters in Materials Science and Engineering from Seoul National University. She received a Masters in International Management from the University of London, King’s College, and also an M.A. in Management Science and Engineering, with a concentration in finance from Stanford University. Inbok is fluent in Korean.
For the year ending 31 December 2023, the Matthews Asia Sustainable Future Fund returned 3.84%, while its benchmark, the MSCI All Country Asia ex Japan Index returned 6.34%. For the fourth quarter of the year, the Fund returned 1.11% versus 6.48% for the benchmark.
Market Environment
2023 was a year of opportunities and challenges marked by two distinct narratives: the Federal Reserve’s ‘higher for longer’ interest rate strategy and China’s labored and ongoing struggle to recover from the pandemic. Elevated interest rates and a strong U.S. dollar posed headwinds while China’s travails impacted the economies of markets like Thailand. But there were also strong performances by markets like India which benefited from national infrastructure programs and strong domestic investor inflows. Smaller companies in emerging markets also thrived in many cases in 2023. And toward the end of the year there was a general consensus that inflation had peaked in the global economy and that the Fed would pivot toward cutting rates in 2024. This provided some tailwinds across markets.
Taiwan was the best-performing market in the region during 2023, followed by South Korea and India. China and Hong Kong were the worst-performing markets followed by Thailand. From a sector perspective, information technology (IT) was the top performer, supported by market exuberance over advancements in generative artificial intelligence (AI), while real estate and consumer staples were the worst performers, impacted in part by China’s challenges in these sectors.
From a currency perspective, the Thai baht, Indonesian rupiah and Philippine peso appreciated against the U.S. dollar. The Malaysian ringgit, Chinese renminbi, South Korea won and India rupee depreciated against the greenback.
Performance Contributors and Detractors
From a country perspective, stock selection in South Korea was the top contributor to total and relative returns in 2023. An overweight and stock selection in India also contributed as did a lack of exposure to Thailand. On the flip side, an overweight allocation and stock selection in China/Hong Kong were the biggest detractors to total and relative returns. As the year progressed, markets grew more pessimistic about the prospects of China’s economic recovery, for a turnaround in its real estate sector and for an improvement in consumer sentiment. An underweight and stock selection in Indonesia also detracted from returns.
At the sector level, an underweight and stock selection in financials, stock selection in real estate, and a lack of exposure to utilities contributed to relative returns in the period. In contrast, stock selection in consumer staples and consumer discretionary were the biggest detractors to performance.
From a holdings perspective, Ecopro BM, a South Korean cathode maker, Shriram Finance, an Indian financial services provider, and Elite Material, a Taiwanese maker of base materials for the printed circuit board (PCB) industry, were among the top contributors to total and relative returns in the year. Ecopro BM’s share price rallied on the expectations of strong pickup in orders from U.S. battery manufacturing capex spend. Shriram continued to deliver strong results and, given its very attractive valuations, the stock performed well. Elite Material did well as the market assessed positively the company’s dominant position in the key raw material involved in making printed circuit boards for high performance chips used for applications such as AI.
On the other hand, our Chinese positions like JD Health International, an online pharmacy and medical services player, Meituan, a leading food delivery company and super-app operator, and Ginlong Technologies, a manufacturer of solar inverters, were among the biggest detractors to relative returns in the year. As markets soured on recovery prospects in consumer sentiment and consumer spending in China, names like Meituan and JD Health were weak. In addition, the market worried about competition within the in-store segment of Meituan from the ecommerce offering of Douyin, ByteDance’s short video platform. We acknowledge the changes in the competitive environment but believe that Meituan will retain a strong market share over the mid-to-long term given its strong value proposition. Our research suggests that Douyin is being used as a medium to bring new customers to the segment and will aid the segment’s overall growth. Ginlong Technologies was weak on account of elevated inventory levels in Europe, a key market for Chinese exporters, as well as expectations of a relatively slower growth year in Ginlong’s segment in China after a very strong 2023. We expect channel inventory to normalize this year and a meaningful drop in solar module prices in 2023 should spur additional demand.
Notable Portfolio Changes
We initiated a number of new positions in the year, including in Eugene Technology, a South Korean semiconductor fabrication-equipment maker that specializes in deposition gear. In addition to its core expertise in low pressure chemical vapor deposition equipment, Eugene is making strong inroads into atomic layer deposition equipment thereby increasing its addressable market. While the company’s products have largely been used in manufacturing memory products, it is also making progress in the semiconductor foundry manufacturing process as well which presents an attractive growth opportunity in the future. Among our exits, we sold Lemon Tree, an Indian mid-market hotel chain operator, to take profits.
Outlook
Today, the Asia ex Japan region contains many companies with solid business models and quality management. In addition, U.S. interest rates are looking downward which should create some macro tailwinds for the coming year. As well as the macro landscape and global trade, our focus in 2024 will be on key emerging markets that are generating robust growth, like India, and those that are challenged, like China, and how they can affect the dynamics of other emerging markets.
Longer term, we expect the emerging markets gross domestic product (GDP) growth-differential with developed markets to improve from a 23-year low reached in 2022. This, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.
Finally, we view sustainable 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. Emerging markets, we believe, are a key destination for sustainable investment themes that offer attractive opportunities for alpha generation.
Rolling 12 Month Returns For the period ended 31/03/2024 - I (Acc)
Performance figures discussed in the Fund Manager Commentary above reflect that of the Institutional Accumulation Class Shares and has been calculated in USD. Performance details provided for the Fund are based on a NAV-to-NAV basis, with any dividends reinvested, and are net of management fees and other expenses. Past performance information is not indicative of future performance. Investors may not get back the full amount invested.
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 Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.
Information contained herein is sourced from Matthews Asia unless otherwise stated. The views and opinions in this commentary were as of the report date, subject to change and may not reflect the writer’s 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 not invest in the Fund solely based on the information in this material alone. Please refer to the Prospectus for further details of the risk factors.
The MSCI All Country Asia ex Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI All Country Asia Pacific Index is a free float–adjusted market capitalization–weighted index of the stock markets of Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Index is a free float-adjusted market capitalization-weighted index of Chinese equities that includes H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges, Hong Kong-listed securities known as Red chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China) and foreign listings (e.g. ADRs).
The MSCI China All Shares Index captures large and mid-cap representation across China A shares, B shares, H shares, Red chips (issued by entities owned by national or local governments in China), P chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g. ADRs). The index aims to reflect the opportunity set of China share classes listed in Hong Kong,Shanghai, Shenzhen and outside of China.
The MSCI China A Onshore Index captures large and mid cap representation across China securities listed on the Shanghai and Shenzhen exchanges. Index is for comparative purposes only and it is not possible to invest directly in an index.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets ex China Index is a free float-adjusted market capitalization-weighted index that captures large and mid cap representation across 23 of the 24 Emerging Markets (EM) countries excluding China: Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets Small Cap Index is a free float-adjusted market capitalization weighted small cap index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungry, India, Indonesia, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan Thailand, Turkey and United Arab Emirates.
The S&P Bombay Stock Exchange 100 (S&P BSE 100) Index is a free float–adjusted market capitalization–weighted index of 100 stocks listed on the Bombay Stock Exchange.
The MSCI Japan Index is a free float–adjusted market capitalization–weighted index of Japanese equities listed in Japan.
The MSCI All Country Asia ex Japan Small Cap Index is a free float–adjusted market capitalization–weighted small cap index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Small Cap Index is a free float-adjusted market capitalization-weighted small cap index of the Chinese equity securities markets, including H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges,Hong Kong-listed securities known as Red Chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g., ADRs).
The MSCI India Index is a free float-adjusted market capitalization-weighted index of Indian equities listed in India.
Indexes are for comparative purposes only and it is not possible to invest directly in an index.
Commentary
Period ended 31 December 2023
For the year ending 31 December 2023, the Matthews Asia Sustainable Future Fund returned 3.84%, while its benchmark, the MSCI All Country Asia ex Japan Index returned 6.34%. For the fourth quarter of the year, the Fund returned 1.11% versus 6.48% for the benchmark.
Market Environment
2023 was a year of opportunities and challenges marked by two distinct narratives: the Federal Reserve’s ‘higher for longer’ interest rate strategy and China’s labored and ongoing struggle to recover from the pandemic. Elevated interest rates and a strong U.S. dollar posed headwinds while China’s travails impacted the economies of markets like Thailand. But there were also strong performances by markets like India which benefited from national infrastructure programs and strong domestic investor inflows. Smaller companies in emerging markets also thrived in many cases in 2023. And toward the end of the year there was a general consensus that inflation had peaked in the global economy and that the Fed would pivot toward cutting rates in 2024. This provided some tailwinds across markets.
Taiwan was the best-performing market in the region during 2023, followed by South Korea and India. China and Hong Kong were the worst-performing markets followed by Thailand. From a sector perspective, information technology (IT) was the top performer, supported by market exuberance over advancements in generative artificial intelligence (AI), while real estate and consumer staples were the worst performers, impacted in part by China’s challenges in these sectors.
From a currency perspective, the Thai baht, Indonesian rupiah and Philippine peso appreciated against the U.S. dollar. The Malaysian ringgit, Chinese renminbi, South Korea won and India rupee depreciated against the greenback.
Performance Contributors and Detractors
From a country perspective, stock selection in South Korea was the top contributor to total and relative returns in 2023. An overweight and stock selection in India also contributed as did a lack of exposure to Thailand. On the flip side, an overweight allocation and stock selection in China/Hong Kong were the biggest detractors to total and relative returns. As the year progressed, markets grew more pessimistic about the prospects of China’s economic recovery, for a turnaround in its real estate sector and for an improvement in consumer sentiment. An underweight and stock selection in Indonesia also detracted from returns.
At the sector level, an underweight and stock selection in financials, stock selection in real estate, and a lack of exposure to utilities contributed to relative returns in the period. In contrast, stock selection in consumer staples and consumer discretionary were the biggest detractors to performance.
From a holdings perspective, Ecopro BM, a South Korean cathode maker, Shriram Finance, an Indian financial services provider, and Elite Material, a Taiwanese maker of base materials for the printed circuit board (PCB) industry, were among the top contributors to total and relative returns in the year. Ecopro BM’s share price rallied on the expectations of strong pickup in orders from U.S. battery manufacturing capex spend. Shriram continued to deliver strong results and, given its very attractive valuations, the stock performed well. Elite Material did well as the market assessed positively the company’s dominant position in the key raw material involved in making printed circuit boards for high performance chips used for applications such as AI.
On the other hand, our Chinese positions like JD Health International, an online pharmacy and medical services player, Meituan, a leading food delivery company and super-app operator, and Ginlong Technologies, a manufacturer of solar inverters, were among the biggest detractors to relative returns in the year. As markets soured on recovery prospects in consumer sentiment and consumer spending in China, names like Meituan and JD Health were weak. In addition, the market worried about competition within the in-store segment of Meituan from the ecommerce offering of Douyin, ByteDance’s short video platform. We acknowledge the changes in the competitive environment but believe that Meituan will retain a strong market share over the mid-to-long term given its strong value proposition. Our research suggests that Douyin is being used as a medium to bring new customers to the segment and will aid the segment’s overall growth. Ginlong Technologies was weak on account of elevated inventory levels in Europe, a key market for Chinese exporters, as well as expectations of a relatively slower growth year in Ginlong’s segment in China after a very strong 2023. We expect channel inventory to normalize this year and a meaningful drop in solar module prices in 2023 should spur additional demand.
Notable Portfolio Changes
We initiated a number of new positions in the year, including in Eugene Technology, a South Korean semiconductor fabrication-equipment maker that specializes in deposition gear. In addition to its core expertise in low pressure chemical vapor deposition equipment, Eugene is making strong inroads into atomic layer deposition equipment thereby increasing its addressable market. While the company’s products have largely been used in manufacturing memory products, it is also making progress in the semiconductor foundry manufacturing process as well which presents an attractive growth opportunity in the future. Among our exits, we sold Lemon Tree, an Indian mid-market hotel chain operator, to take profits.
Outlook
Today, the Asia ex Japan region contains many companies with solid business models and quality management. In addition, U.S. interest rates are looking downward which should create some macro tailwinds for the coming year. As well as the macro landscape and global trade, our focus in 2024 will be on key emerging markets that are generating robust growth, like India, and those that are challenged, like China, and how they can affect the dynamics of other emerging markets.
Longer term, we expect the emerging markets gross domestic product (GDP) growth-differential with developed markets to improve from a 23-year low reached in 2022. This, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.
Finally, we view sustainable 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. Emerging markets, we believe, are a key destination for sustainable investment themes that offer attractive opportunities for alpha generation.
Rolling 12 Month Returns For the period ended 31/03/2024 - I (Acc)
Sources: Brown Brothers Harriman (Luxembourg) S.C.A, Matthews Asia, FactSet Research Systems, Bloomberg