For the year ending December 31, 2022, the Matthews Emerging Markets Equity Fund returned -20.94% (Investor Class) and -20.81% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned -19.74% over the same period. For the fourth quarter, the Fund returned 11.69% (Investor Class) and 11.66% (Institutional Class), while the benchmark returned 9.79%.

Market Environment:

Markets around the world were weak in 2022. U.S. markets had their worst year since the global financial crisis of 2008 and their fourth-worst year since the 1930s. The MSCI Emerging Markets Index was also down more than in any year since 2008 and had its second-worst year since 2000. Many concerns contributed to the weakness in markets including: persistent inflation in many regions and rising interest rates; Russia’s invasion of Ukraine which contributed to both inflation and recession risks globally; rising tensions between China and the U.S.; and President Xi’s moves to consolidate political and economic power in China. In addition, high starting valuations and the post-pandemic normalization of consumer spending patterns contributed to dramatic declines in many high-growth stocks. Conversely, high raw material prices and strong company fundamentals helped many commodity stocks in 2022. Consequently, Latin American countries performed relatively well, with Brazil leading the pack.

In the fourth quarter, markets rebounded and emerging markets outperformed developed markets in December as investors worried about a hawkish U.S. Federal Reserve and inflation fell or stabilized in many emerging markets. By year end, the U.S. dollar had weakened from its peak in September. A weaker greenback often reflects optimism about global growth relative to the U.S. Markets also began to anticipate a re-opening of the Chinese economy after the abrupt abandonment of the zero-COVID policy.

Performance Contributors and Detractors:

At the regional level, Russia was by far the biggest detractor to relative performance in 2022 as we held four Russian stocks at the time of the Ukraine invasion. We draw to two lessons from the episode. One is to be wary of undemocratic regimes in which decision-makers aren’t constrained by civil society and the second is that a so-called “fortress balance sheet” at the country level can embolden aggressive leaders to make poor decisions. These conclusions inform our cautious approach to certain other markets, such as Saudi Arabia, even as we appreciate the social and market reforms being undertaken there. Our stock selection in India was another detractor from performance in 2022 as was our underweight in United Arab Emirates and our lack of exposure to Kuwait, Saudi Arabia and South Africa. On the other hand, our overweight in Mexico and Brazil were among the biggest contributors to performance. Our underweight and stock selection in South Korea, our underweight to Taiwan and our overweight to Vietnam were also top contributors.

At the sector level, real estate was the top contributor. Stock selection in information technology was the biggest contributor but was offset by our overweight position. Stock selection in materials and our underweight in communication services were also positive contributors. Conversely, stock selection in energy was the biggest detractor and financials and health care were also detractors.

At the holdings level, a number of Brazilian stocks were among the top contributors, including Petrobras, the oil and gas conglomerate, and Vale, the metals and mining group, which both benefited from high commodity prices. Banco BTG Pactual also performed well as the Brazilian economy strengthened. On the flip side, Russian stocks including energy companies Lukoil and Novatek, and banking financial group Sberbank, were among the worst performers as their values crashed after Russia’s invasion of Ukraine.

Notable Portfolio Changes:

In the fourth quarter, we added a handful of stocks and exited a handful of positions leaving the name count unchanged at 59. After visiting Brazil in November following the election, we started a position in Weg, an industrial motors producer which has translated its success in Brazil to China and other countries. We also added two China-related companies—Hong Kong Exchanges and Clearing and CSPC Pharmaceutical Group—and increased the number of China/HK stocks in the portfolio to 11. We also added United Arab Emirates-based Fertiglobe, a fertilizer company which is a leader in managing costs—a key attribute for maintaining annual crop yields. In the semiconductor space, our sale of LAM Research to buy Applied Materials was driven by a desire to reduce exposure to memory in favor of foundry while also realizing a tax loss to minimize shareholder distributions.

Outlook:

Looking to the year ahead we see two positive developments driving optimism about emerging markets. Firstly, inflation is falling in much of the world and secondly, China’s abandonment of its zero-COVID policy should quickly lead to a re-opening of its economy. Companies we speak to are aware of recession risks and are challenged by rising costs but few are noticing dramatic declines in demand for their products and services or facing meaningful financial or operating stresses.

Our focus remains on good companies—those which can succeed in a variety of macroeconomic and political environments. Many of our portfolio companies reacted rationally to the turbulent events of recent years by strengthening their balance sheets, reducing costs, and improving their competitive positions. Some commodity businesses, for example, have seen the disruption in energy and mining production, as well as the growing needs for certain materials in the energy transition, as reasons to move forward with important projects. Many companies we have exposure to have managed through a number of volatile cycles in the past and emerged stronger. As the world looks beyond the most disruptive consequences of the pandemic, we believe our holdings are positioned to emerge stronger still.

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

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