For the quarter ending March 31, 2021, the Matthews Pacific Tiger Fund returned 1.57% (Investor Class) and 1.60% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned 2.75%.

Market Environment:

Asia’s equity markets started the year on a strong note continuing the trends experienced last year. However, the initial gains were nearly eroded as fears of a spike in inflation triggered a rotation among Asian equities from growth stocks toward more value-oriented stocks.

The rotation was driven by the relative attractiveness of valuations in sectors that were severely affected by the pandemic last year, as investors expect that there will be earnings recovery to be had. In particular, growth companies in China that experienced significant run ups in valuations last year saw their earlier gains reversed. Furthermore, investors continue to try to assess the potential impact of some regulatory proposals in China that seek to balance free flow of data and consumer privacy. Consumer discretionary was one of the weakest sectors during the sell-off as it is vulnerable to both these trends.

On a positive note, Taiwan’s equity markets held up well in the quarter. With significant exposure to the semiconductor technology, Taiwan benefited from continued strong demand for computer chips. As the global economy continues to get back on its feet, the outlook for semiconductors remains favorable. In addition, some of the worst performing markets, including Thailand, are starting to attract investor attention as the prospects for tourism is starting to look a bit better. With the economic recovery starting to gain pace and breadth, many small-cap companies may be well placed to benefit from more favorable economic conditions. Consequently, small caps outperformed large caps quite handily.

Performance Contributors and Detractors:

Stock selection in South Korea was a contributor to performance. Container shipping company HMM Co., Internet services provider Naver Corp. and beauty product manufacturer Amore Pacific are three examples of positive stock selection in South Korea in the quarter. HMM is a new position and Amore Pacific is a newly re-initiated position. Naver remains a steady performer with attractive long-term growth potential. Internet services in general got a boost from the pandemic and Naver’s e-commerce business continued to demonstrate strong market share gain.

On the other hand, stock selection in China was a detractor. Solar producer Xinyi Solar Holdings, power semiconductor producer StarPower Semiconductor Ltd. and health care company Jiangsu Hengrui Medicine each saw share price weakness in the quarter. In the case of Xinyi and StarPower, we have added to the positions as the risk-reward looks more favorable, and we look to build the weight in the portfolio. We exited Jiangsu Hengrui Medicine.

Notable Portfolio Changes:

During the quarter, we initiated a new position in Shandong Sinocera Functional Material Co., a Chinese specialty chemical company. In addition to making chemicals that are used for key components of autos and electric vehicles (EVs), the company also makes materials that go in to dental and orthopedic materials. Shandong Sinocera is the type of specialized company that might be more common in mature markets such as South Korea or Japan but we are increasingly starting to see this type of innovative company emerge out of China. While the company is classified in materials sector, the underlying exposure of the company’s business model is toward consumer-focused areas such as health care, which are very hard to get exposure to in China without paying high premiums on the valuations.

As mentioned earlier, South Korean container shipping company HMM was a new addition in the quarter. HMM is a unique business turnaround case as they went through cost rationalization exercise in recent years while going through the industry’s consolidation. HMM has emerged as a leading shipping company in South Korea and we believe that there will be more improvement to be delivered for the shareholders. Additionally, strong demand for physical goods during the pandemic, together with reduced supply of the shipping vessels, accelerated its earnings improvement. We also reinitiated a position in South Korean cosmetics company Amore Pacific in the fourth quarter of 2020, and continued to build the position in the first quarter of 2021. This consumer focused company is continuing to restructure, with improvements to the management team and a focus on contemporizing their brands to better meet the needs of sophisticated consumers.

Outlook:

Across the region, we see a return to normalcy, leading to better economic prospects for businesses. Parts of Asia have progressed from recovery to expansion, while others like India and Indonesia are still getting back to pre-pandemic levels of activity. Some of the economic indicators in India are pointing to a steady improvement but we await confirmation of the trend in stronger credit activity.

While there are some signs of an uptick in inflation, it remains to be seen if these pressures will persist. Some of the inflationary pressures may have been driven by supply chain disruption and, hence may be shorter-term in nature. Major central banks in Asia have opted to leave interest rates largely unchanged in the quarter.

There is some concern that Asian economies may suffer a liquidity crunch as interest rates start to rise in the U.S. It is worth noting that a change to interest rates is being driven by favorable growth expectations. Furthermore, compared to prior periods of an increase in interest rates, foreign exchange reserves have grown noticeably and current account deficits have switched from deficit to surplus for countries like India. Both India and Indonesia continue to receive inflows into equities from foreign institutional investors during recent periods of volatility.

Looking ahead, earnings growth, liquidity and valuations all appear supportive of Asia’s equity markets. We expect strong corporate earnings across Asia in 2021 as the global recovery continues to expand. Across the region we see sufficient liquidity. While we have not seen as much uptake in credit, any pick up in credit issuance should further support economic growth. And valuations, which started the year slightly elevated in parts of the market, have become more reasonable.

As of 3/31/21, the securities mentioned comprised the Matthews Pacific Tiger Fund in the following percentages: HMM Co. Ltd, 1.6%; Naver Corp., 1.9%; Amore Pacific Corp., 1.2%; Xinyi Solar Holdings Ltd., 1.1%; StarPower Semiconductor Ltd., 1.0%; Shandong Sinocera Functional Material Co., 1.0%. The Fund held no positions in Jiangsu Hengrui Medicine. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MAPTX as of 03/31/2021