For the quarter ending September 30, 2023, the Matthews Pacific Tiger Fund returned -5.42% (Investor Class) and -5.37% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -3.22%.

Market Environment:

The last quarter was a challenge for most major markets in the region. Resilience in the U.S. fueled concerns that the Federal Reserve will sustain interest rates higher for longer and this pressured risk assets globally. A rise in oil prices and renewed strength in the U.S. dollar were further headwinds towards equity markets. In China, economic data continued to be short of market expectations while negative news about the real estate sector continued to linger. The Taiwan and South Korea markets at the index level were weak with increasing concern over the global demand environment into next year. On a more optimistic note, the cadence of policy announcements aimed at supporting China’s domestic economy seems to suggest that the government is intent on getting the economy moving again. Elsewhere, India’s equity market performed strongly in the period helped by a strong macroeconomic backdrop, healthy corporate earnings and solid domestic equity inflows.

Performance Contributors and Detractors:

At a regional level, the portfolio’s stock selection in China/Hong Kong was the biggest detractor from relative performance in the quarter with ongoing concern over consumer demand amid a challenging external environment especially around the property market. Stock selection in India also weighed on performance as some of the growth of the companies in the portfolio didn’t meet heightened market expectations though the growth trend was solid. Conversely, the portfolio’s off-benchmark allocation to the frontier market of Vietnam was the largest contributor to relative returns. Allocation and stock selection in Taiwan and an underweight position in South Korea also contributed positively to relative performance, limiting exposure to the declines both markets endured amid concerns over global growth.

At the sector level, stock selection in consumer discretionary, particularly in China and South Korea, had a negative impact on relative returns. Though the earnings progress of these companies was positive, general concern over the outlook of Chinese consumer demand and global auto demand dragged down share price performance. On the other hand, stock selection in industrials was the top contributor across China, India and South Korea as companies executed well resulting in positive earnings and market share gains.

At the holdings level, China Resources Beer in China and HL Mando, an auto component company in South Korea, were the biggest detractors to relative returns. For China Resources Beer, premiumization of consumption continued and company delivered a solid set of results. However, general concern over weak consumer sentiment in China dragged down performance. Mando was a similar case as the company delivered continued margin expansion with good sales growth but concerns over a potential slowdown in auto demand and increasing competition affected performance negatively.

In contrast, Accton Technology, a networking-equipment company in Taiwan, was the top contributor to total and relative returns in the period. With an acceleration in client upgrade demand for the data center, the company delivered good results with sustainable prospects. Shenzhen Inovance, a leading automation company in China, also contributed  as the company continued to gain market share across the business segment, delivering solid earnings growth above the industry average.

Notable Portfolio Changes:

The third quarter was a relatively quiet period as no major directional shifts were made. We remained committed to holding high conviction names in China as we believe positive earning delivery together with attractive valuations provide good long-term opportunities especially around the domestic-oriented industries. At the same time, we continued to search for new opportunities and initiated a position in Orion Corp., a consumer staples company in South Korea, and added to our holding in FPT Corp., a Vietnamese information technology (IT) company. We believe these companies have successfully expanded their end markets beyond their domestic territories by leveraging the competitive strength that they have built in the past and paving ways to sustainable long-term growth.

Outlook:

The macro outlook remains challenging to Asian equity markets amid the prospect that the Federal Reserve may maintain a policy of higher rates for longer. China is also dealing with challenges in the property market and consumer sentiment is low. However, companies in Asia continue to offer resilient earnings prospects especially for the quality companies with strong balance sheets and good management execution. In the near term, the valuation backdrop across different countries in Asia offers a range of opportunities and risks, meanwhile an aggregate level valuation is at a reasonable level. For China, appealing valuations together with large domestic savings and policy cadence changes are the reasons to be constructive. Elsewhere, India’s economic growth and equity market continue to look robust while we remain cautious in factoring the valuation risk. For South Korea and Taiwan, while these countries may be sensitive to a potential slowdown in global demand, we believe their strong economic and trading ties within Asia could serve them as a ballast, particularly if China’s domestic economy starts to stabilize.  

View the Fund’s Top 10 holdings as of September 30, 2023. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MAPTX as of 09/30/2023