For the quarter ending March 31, 2023, the Matthews Emerging Markets Equity Fund returned 3.41% (Investor Class) and 3.41% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned 4.02%.

Market Environment:

Despite the shocking failures of Silicon Valley Bank and Signature Bank and serious concerns about other U.S. regional banks, most markets ended the quarter higher than the beginning of the year. Markets also weathered the Federal Reserve’s eighth and ninth rate hikes in its current cycle, which began in March 2022. The S&P 500 finished the quarter up 7.5%, and the MSCI All Country World Index was up 7.4%. The U.S. dollar index began the year at a strong 104.5, rallied to a peak of 105.6 in early March but had fallen to 102.5 by quarter end. The Chinese economy’s re-opening, more evidence of declining inflation in the U.S. and other countries and growing optimism that a global recession would be either mild or not happen at all, were all factors that helped lift markets around the world in the first quarter.

Performance Contributors and Detractors:

At the country level, our overweight and stock selection in Mexico – our largest country active position compared to the benchmark – was the biggest contributor to relative performance in the first quarter. Several stocks in Mexico were important positive contributors in the quarter and they rallied partly on optimism that Mexico is in store for a renewed Foreign Direct Investment (FDI) cycle given near-shoring trends. Stock selection in India was a positive contributor as there is no exposure to problematic investment groups. Our lack of holdings in Saudi Arabia and South Africa was also a contributor.

On the other hand, our overweight and stock selection in Brazil was the biggest detractor to performance. Investors were disappointed that newly elected President Lula began to push for far-left policies, including criticism of central bank austerity, and prepare for more government spending. We weren’t surprised by these moves and don’t expect them to derail the positive fundamentals of the companies we are invested in. Our underweights in Taiwan and South Korea were also detractors resulting from our lack of ownership of semiconductor and technology stocks that performed well in those markets.

At the sector level, stock selection in real estate was the biggest contributor to relative performance while stock selection in information technology was the biggest detractor. 

Among individual holdings, our off-benchmark positions in U.S. semiconductor equipment company Applied Materials and French luxury goods company LVMH—which both derive a significant part of their earnings from emerging markets—were top contributors to relative performance. In contrast, the biggest detractor was Brazilian medical insurer and provider Hapvida, which failed to produce evidence that it is recovering from a challenging post-pandemic and post-merger reality. Call center company TDCX in Singapore and Indian restaurant operator Restaurant Brands Asia were also meaningful detractors.

Notable Portfolio Changes:

We added six new positions to the portfolio during the quarter. They included Thai hospital operator Bangkok Dusit, Indian cement company Ultratech and the Chinese biopharmaceutical Innovent Biologics. Bangkok Dusit is a leading hospital operator in Thailand and is benefiting from the return of health tourism and constructive changes in Thailand’s insurance market. Ultratech’s cement business is heavily geared towards consumption and general economic activity in India, where real GDP on consensus is north of 6% for the next few years. There are relatively high barriers to entry in many of Ultratech’s markets and we believe the company is at an accessible entry point for its potential growth. Innovent is a world-class biopharmaceutical company that develops, manufactures and commercializes high-quality, innovative medicines for the treatment of cancer, autoimmune metabolic and other major diseases. It also has an emerging business in diabetes and obesity that may have potential.

We exited seven positions in the quarter. They included Petrobras in Brazil, Qatar National Bank and BIM Birlesik Magazalar in Turkey. With Petrobras, the combination of high oil prices and a more meddlesome administration may constrain the potential upside to the stock. With QNB, we exited a bank that has not been positively geared to Qatar’s economic cycle, as we had expected. In the case of BIM, a Turkish discount retailer, the stock had done well and we exited as the Turkey election approached. We don’t know how the election will turn out but multiple potential policy outcomes could be challenging for Turkish consumers and the currency.

Outlook:

In our conversations with companies, few have strong predictions about what lies ahead for the world economy or in important political contests. But few are seeing meaningful stresses to their businesses from macro issues and most are continuing to invest for the future. These include companies in the whole range of industries we study, from mining to energy to consumer to finance. Our focus remains on good companies—those which can succeed in a variety of macroeconomic and political environments.

Top 10 holdings as of March 31, 2023. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MEGMX as of 03/31/2023