Matthews China Fund


Period ended 30 September 2020

For the quarter ending 30 September 2020, the Matthews China Fund returned 10.86%, while its benchmark, the MSCI China Index, returned 12.57%.

Market Environment:

Chinese monthly economic data continues to show signs of recovery as reflected in the latest manufacturing and service PMI data as well business recovery statistics. Even the slow-to-recover consumer-oriented sectors are starting to show improvement including restaurant sales, cinema box office receipts and domestic travel. Domestic recovery is occurring alongside a stabilizing export sector and improving labor market, both of which should support better earnings prospects going forward.

COVID-19 remains a risk for economies globally, including China. While small pockets of coronavirus infections still occasionally emerge, China remains successful at flattening its curve of COVID-19 infections. Vigilant about testing, quarantining known cases and contact tracing, China has had the most success among large economies in our view in combatting the virus.

Chinese equities posted solid returns in the quarter, despite negative headlines about U.S. — China relations. Political tactics have so far focused on individuals and companies, as opposed to broad economic sanctions and negative policy. To date, the actions have been more disruptive to sentiment than economically damaging to either side. Looking at the U.S. side, it is difficult to decipher which portions of the negative rhetoric have true congressional support versus what is politically motivated by the election cycle.

Performance Contributors and Detractors:

From a sector perspective, stock selection in the financials, communications services and industrials was a contributor to relative performance. On the other hand, stock selection in health care, real estate and consumer discretionary sectors was a detractor.

A contributor among individual stocks was e-commerce company JD.com, which experienced increased demand for its services during the pandemic. As the second largest e-commerce company in China, JD.com has a broad reach and its profitability is improving. Logistics-oriented businesses tend to be very capital intensive in their early years, but with much of JD.com's logistic infrastructure already in place, we expect that the business may be less capital intensive going forward. China has many metropolitan densities and the complexity of making deliveries to most households is high, creating a competitive moat for an e-commerce player such as JD.com.

A detractor among individual stocks was property developer Times China, which focuses on developments in the Greater Bay Area in Guangdong province. This area has been earmarked for further development in high-value-adding sectors such as the technology and financial industries, and is likely to see growth in infrastructure connectivity over time. Times China has an ample land bank in this region, allowing it to continue to grow its footprint. The real estate industry has been sluggish as the pandemic has disrupted sales in China, but we continue to like the company's long-term prospects in land banking, as well as its attractive valuations.

Notable Portfolio Changes:

In the third quarter, we added a number of new positions, including four domestically listed A-share companies. New A-share positions include two health care companies, an information technology company and an industrials company. Other new positions include a fast-growing communication services platform and two Hong Kong-listed health care companies. New positions highlight our emphasis on growing domestic consumption in China. The IMF forecasts that China will be the only large economy to generate positive growth in 2020 and domestic consumption will play an important role in maintaining China's economic engine. As we rotated capital within the portfolio during the quarter, we were particularly interested in opportunities among China's knowledge-based sectors, where intellectual property and research and development can help companies build competitive moats.

Outlook:

Chinese manufacturing data points to a continued v-shaped recovery and a bright spot within the data suggests that small, private businesses are beginning to participate within the rebound. Fiscal stimulus in China has been incremental in scope and highly targeted, a trend we expect may continue. Interest rates in China have moved higher, reflecting China's economic resilience amid the pandemic. Looking ahead, we expect to see continued recovery in China's economic activity. While China is not immune from a global slowdown, it may be better positioned than other large economies to maintain its long-term growth.

Schools have reopened in Wuhan, the first city to be hit by the pandemic earlier in the year. China's effective health care response has played an important role in reopening school, businesses and government offices across China. Keeping the coronavirus under control is key to maintaining China's economic recovery, and we continue to see reasons for optimism on the public health front. Positive sentiment among domestic Chinese consumers is spurring increased economic activity. U.S. — China political tensions could heat up heading into the U.S. election, but escalating rhetoric may have little impact on either economy.

Rolling 12 Month Returns for the period ended 30 September 2020
Matthews China Fund 2020 2019 2018 2017 2016
I (Acc) (USD) 41.87% 2.62% 0.99% 33.75% 12.75%
MSCI China Index (USD) 33.76% -3.77% -2.05% 33.27% 13.18%
I (Acc) (GBP) 36.18% 8.69% 3.70% 29.47% 31.93%
MSCI China Index (GBP) 27.50% 1.83% 0.77% 29.03% 31.98%

Risk Considerations

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 and emerging market securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The Fund invests in holdings denominated in foreign currency, 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. Investments in a single-country fund may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. These and other risks associated with investing in the Fund can be found in the Prospectus.



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 International Capital Management, LLC (“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.

Sources: Brown Brothers Harriman (Luxembourg) S.C.A, Matthews Asia, FactSet Research Systems, Bloomberg