For the year ending December 31, 2022, the Matthews Asia Growth Fund returned -33.12% (Investor Class) and -32.99% (Institutional Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned -16.92% over the same period. For the fourth quarter, the Fund returned 10.50% (Investor Class) and 10.58% (Institutional Class), while the benchmark returned 12.52%.

Market Environment:

2022 was a difficult year for growth investors globally—though it played out differently in Asian markets versus the U.S. and elsewhere. As inflation concerns increased early in the year, value stocks staged a tremendous rally globally. But for the next two quarters this trend moderated in Asian markets where inflation remained relatively tamer. In the fourth quarter, we saw a modest rally in Asian growth stocks—particularly after the Chinese government’s announcement in December that it planned to dismantle its zero-COVID policy. However, this rally was insufficient to erase calendar-year losses.

Another major factor for Asian markets in 2022 was the Japanese yen, which weakened significantly as much of the developed world raised interest rates to fight inflation while the Bank of Japan maintained its highly accommodative stance. The weak yen weighed on Japanese markets, which fell 16% in the year.

Performance Contributors and Detractors:

In one of the most challenging years we’ve experienced as investors, relative performance was significantly tested. At the country level, our stock selection in China/Hong Kong was the biggest detractor to performance in 2022 as our holdings encountered multiple simultaneous headwinds in the form of their growth orientation, technology focus and the negative sentiment resulting from ongoing political tensions between the U.S. and China. Stock selection in Japan was also a big detractor as low inflation persisted until late in the year and a weak yen weighed on both the economy and markets. Conversely, our lack of exposure in South Korea and underweight in Taiwan were top contributors to performance. The Fund also benefited from its overweight position and stock selection in Indonesia, which has been a relative bright spot in 2022 given its lower exposure to growth industries like information technology (IT) and communication services.

At the sector level, our stock selection in consumer discretionary was the biggest detractor while stock selection in IT and communication services also detracted from performance. Many of our holdings in these sectors—and in health care where allocation was a detractor as well as stock selection—were pressured not just by their growth orientation but also because many are Chinese.

At the holdings level, among the Fund’s bottom contributors were XPeng and Sea. Chinese electric vehicle (EV) maker XPeng was until recently one of only a few EV companies in China and serving the upper-middle segment of the market. However, 2022 saw a meaningful increase in competition which has pressured the company’s shares.

Singapore-based e-commerce and gaming platform Sea, operating mainly in Southeast Asia, experienced a decline in subscriptions as economies normalized in the wake of COVID which hurt the company’s revenues and weighed on shares. However, we remain constructive on the outlook given Sea’s dominant market share in its existing markets and growing share in new emerging markets like Brazil.

Among the Fund’s top individual contributors were Daiichi Sankyo and Bank Rakyat Indonesia. Japanese pharmaceutical Daiichi Sankyo produces Enhertu, one of the world’s leading breast cancer drugs. We are attracted to the company’s solid fundamentals and the positive outlook for Enhertu. Bank Rakyat, one of the leading Asian banks, benefited from the interest rate environment in 2022. As a growth-oriented bank it has been a long-term holding in our portfolio and we maintain our conviction in the outlook.

Notable Portfolio Changes:

In anticipation of a normalizing economic environment in a post-zero-COVID China, we shifted some capital in the fourth quarter to Chinese, growth-oriented names—including technology giants Alibaba and JD.com. We also introduced a position in Japanese commercial bank Sumitomo Mitsui as we anticipate the beginning of a potential rate-hike cycle in Japan. The bank’s fundamentals are solid and we capitalized on an attractive valuation to purchase shares.

We funded these purchases with several sales, including Bajaj Finance in India, which we trimmed as the position size had increased in our portfolio. We exited Ono Pharmaceutical in Japan, whose flagship cancer drug Opdivo has seen slowing sales as its growth matures. We also exited our position in XPeng given the increased competition it faces.

Outlook:

As we enter 2023, we see reasons for optimism. The end of zero-COVID in China should reverse the relative economic and consumption malaise the country has faced in recent years. Increased economic activity in China could also prompt a bounce-back among growth stocks, whose valuations have decreased meaningfully thanks to the value rally in the first quarter of last year.

We think Japan could be worth watching too, as the country possibly finally starts to see signs of wage inflation which, in contrast to much of the world, would be an overall economic positive for a nation that has faced over two decades of economic stagnation and low inflation. We also anticipate moderately rising interest rates as the new Bank of Japan governor pivots toward a slightly more hawkish stance—which would in turn help stabilize the yen. Given overall solid fundamentals and still-cheap valuations, this could prove an attractive combination for investors in 2023.

India remains on solid economic footing—though nascent signs of inflation thanks to high oil prices could mean higher government deficits and pose an economic headwind. In our view, India’s economic outlook will hinge heavily on what happens with domestic interest rates. That said, for investors willing to be selective, India continues to offer compelling growth-oriented investing opportunities.

Though we have no way to forecast the outcome of major, ongoing global events such as the war in Ukraine, we believe the outlook for 2023 is relatively favorable. That said, it’s a rare year which doesn’t present investors with relatively meaningful surprises, and as ever, we will remain prepared to pivot accordingly.

Top 10 holdings as of December 31, 2022. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MPACX as of 12/31/2022