Matthews India Fund

Period ended 31 March 2020

For the quarter ending 31 March 2020, the Matthews India Fund returned -33.48% while its benchmark, the S&P Bombay Stock Exchange 100 Index returned -32.73%.

Market Environment:

India's broader markets fell sharply in the month of March amid fears about the potential impact of coronavirus on India's economy. Notably, the market decline in India preceded any actual health care crisis. Market participants feared that India's dense cities and sparse health care infrastructure might be particularly vulnerable to the epidemic. While these concerns are genuine, they had not come to fruition in the reporting period.

On a positive note, India's government instituted nationwide shelter-in-place orders on March 25 to reduce the speed of transmission in the country. In addition, India's Finance Minister announced a fiscal package of 1.75 trillion India rupee (0.8% of GDP) in hopes to aid low-income households while in lockdown. Many market participants expect further fiscal support in coming weeks. India's central bank announced rate cuts of 75 basis points (0.75%) and importantly, the liberalization of certain securities within government bond markets, which could open the door for more foreign participation and even eventual index inclusion.

India's small- and mid-cap stocks underperformed large-cap stocks. More cyclical sectors and leveraged businesses like energy and financials underperformed less cyclical businesses like communication services and consumer staples. Most analysts are revising downward their year over year GDP growth projections—some by more than 50%. Similarly, earnings expectations are expected to be cut. We believe Indian markets have already priced in significant reductions in earnings.

Performance Contributors and Detractors:

During periods of uncertainty, investors tend to rush into the largest and most liquid businesses, hurting the stock prices of small businesses. The Fund's allocation to small- and mid-cap stock was a detractor from performance across sectors, mostly notably in consumer staples and information technology. Within financials, our higher exposure to small finance banks and non-bank financials also was a detractor from performance. In contrast, stock selection within the industrials sector was a positive contributor, largely led by some of our exposure to rural India. Much of rural India is insulated from current shelter-in-place orders and we expect rural parts of the country to return to normal business sooner. Our high allocation to health care also helped us deliver a marginally better performance compared to the benchmark index.

Notable Portfolio Changes:

We continued to increase liquidity in the portfolio in the quarter by selling some smaller, less liquid positions. During the quarter, we exited commercial bank Au Small Finance Bank to help improve liquidity. We also exited IT solutions provider NIIT Technologies as part of our valuation discipline. The stock price had appreciated considerably and we chose to lock in profits.

We also added a number of positions, including Reliance Industries, a conglomerate with diversified business lines that include telecom, retail and petrochemicals. We see several potential tailwinds for the company representing opportunities for attractive potential growth. First, the telecom industry in India is going through massive consolidation, a trend that could benefit companies with scale, such as Reliance Industries. Second, the company's brick and mortar retail franchise could greatly enhance its expansion into e-commerce through brand loyalty and recognition. Finally, its refining business has some of the lowest refining costs in the industry and generates attractive cash flows.


Looking ahead, much uncertainty remains in terms of the potential impact of the coronavirus on the India's economy. The current situation of experiencing an instant nationwide economic shutdown is unprecedented in scope. Accordingly, we will continue to watch how the situation evolves. However, stock prices already reflect a good deal of uncertainty. The dramatic decline in stock prices in the first quarter may have been overly pessimistic in our view.

Risks to India's economy include potential strain on its health care system, loss of income among daily wage earners and significant impairment of microbusinesses. On the positive side, we expect further stimulus from the government. The central bank could extend monetary easing, reducing the cost of capital and stabilizing demand in the near term. We also expect the rural side of the economy to continue to improve. Wheat is the main crop of the rabi harvest—agricultural crops sown in winter and harvested in the spring in India—and yields look better than expected.

We believe our portfolio's emphasis on companies with strong balance sheets means our holdings appear well positioned to weather the uncertainty. We expect companies that can hold steady during the economic shock to come out stronger and more profitable. In the meantime, we see Indian equities as having strong growth potential from a bottom up perspective. As valuations have corrected significantly, businesses are trading far below their fair value in our opinion. The investable pool of stocks has become much larger, creating an opportune environment for active managers with a long-term view.

Rolling 12 Month Returns for the period ended 31 March 2020
Matthews India Fund 2020 2019 2018 2017 2016
I (Acc) (USD) -35.65% -0.99% 12.18% 22.51% -15.85%
S&P Bombay Stock Exchange 100 Index (USD) -31.53% 7.00% 11.64% 25.21% -12.92%
I (Acc) (GBP) -31.83% 6.49% -0.49% 41.30% -13.63%
S&P Bombay Stock Exchange 100 Index (GBP) -28.25% 16.20% -0.74% 43.71% -10.19%

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