For the year ending December 31, 2023, the Matthews Emerging Markets Sustainable Future Fund returned 7.83% (Investor Class) and 8.04% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned 10.27% over the same period. For the fourth quarter, the Fund returned 2.35% (Investor Class) and 2.40% (Institutional Class), while the benchmark returned 7.93%.

Market Environment 

2023 was a year of opportunities and challenges marked by two distinct narratives: the Federal Reserve’s ‘higher for longer’ interest rate strategy and China’s labored and ongoing struggle to recover from the pandemic. Elevated interest rates and a strong U.S. dollar posed headwinds while China’s travails impacted the economies of other markets like Thailand. But there were also strong performances by markets like India which benefited from national infrastructure programs and strong domestic investor inflows. Smaller companies in emerging markets also thrived in many cases in 2023. And toward the end of the year there was a general consensus that inflation had peaked in the global economy and that the Fed would pivot toward cutting rates in 2024. This provided some tailwinds across markets. 
 
Hungary was the best-performing emerging market during 2023, followed by Greece, Poland and Egypt, while larger markets like India, Brazil and Mexico delivered robust returns. China was the worst-performer followed by Thailand and Kuwait. From a sector perspective, information technology (IT) was the top performer, supported by market exuberance over advancements in  generative artificial intelligence (AI), while real estate and consumer discretionary were the worst performers, impacted in part by China’s challenges in these sectors.

From a currency perspective, Latin American currencies like the Colombian peso, Mexican peso and Brazilian real appreciated against the U.S. dollar alongside Eastern European currencies like the Polish zloty and Hungarian forint. The Argentinian peso, Turkish lira and South African rand were the worst performers.

Performance Contributors and Detractors 

From a country perspective, stock selection in South Korea was the top contributor to total and relative returns. Stock selection in Brazil and an overweight and stock selection in India also contributed. 

On the flip side, an overweight allocation and stock selection in China/Hong Kong were the biggest detractors to total and relative returns in the period. As the year progressed, markets grew more pessimistic about the prospects of China’s economic recovery, for a turnaround in its real estate sector and for an improvement in consumer sentiment. A lack of exposure to Mexico and Greece and an allocation to Estonia also detracted from relative returns. 

At the sector level, an overweight and stock selection in financials, stock selection in real estate, and an underweight and stock selection in consumer discretionary contributed to returns. In contrast, stock selection in consumer staples and IT and a lack of exposure to energy were the biggest detractors to relative performance.

From an individual holdings perspective, Ecopro BM, a South Korean cathode maker, Shriram Finance, an Indian financial services provider, and YDUQS, a Brazilian on-campus and distance-learning education company, were the top contributors to relative returns. Ecopro BM’s share price rallied on the expectations of a strong pickup in orders from U.S. battery manufacturing capex spend. Shriram continued to deliver strong results and, given its very attractive valuations, the stock performed well. YDUQS recovered well from pandemic-related weakness and as Brazilian interest rates started dropping the market took a more positive view on the company’s reduced debt-servicing burden. Very depressed valuations earlier in the year also helped the stock perform well.

On the other hand, our Chinese positions like Meituan, a leading food delivery company and super-app operator, JD Health International, an online pharmacy and medical services player, and Ginlong Technologies, a manufacturer of solar inverters, were the biggest detractors to relative returns in the year. As markets soured on recovery prospects in consumer sentiment and consumer spending in China, names like Meituan and JD Health were weak. In addition, the market worried about competition within the in-store segment of Meituan from the ecommerce offering of Douyin, ByteDance’s short video platform. We acknowledge the changes in the competitive environment but believe that Meituan will retain a strong market share over the mid-to-long term given its strong value proposition. Our research suggests that Douyin is being used as a medium to bring new customers to the segment and will aid the segment’s overall growth. Ginlong Technologies was weak on account of elevated inventory levels in Europe, a key market for Chinese exporters, as well as expectations of slower growth in Ginlong’s segment in China after a very strong 2023. We expect channel inventory to normalize this year and a meaningful drop in solar module prices in 2023 should spur additional demand.

Notable Portfolio Changes 

We initiated a number of new positions in the year, including in Eugene Technology, a South Korean semiconductor fabrication-equipment maker that specializes in deposition gear. In addition to its core expertise in low pressure chemical vapor deposition equipment, Eugene is making strong inroads into atomic layer deposition equipment thereby increasing its addressable market. While the company’s products have largely been used in manufacturing memory products, it is also making progress in the semiconductor foundry manufacturing process which presents an attractive growth opportunity in the future. Among our exits, we sold China Conch Venture Holdings, a company involved in the energy and construction sectors, as we found better use of capital elsewhere.  

Outlook

Today, emerging markets contain many companies with solid business models and quality management. In addition, U.S. interest rates are looking downward which should create some macro tailwinds for the coming year. As well as the macro landscape and global trade, our focus in 2024 will be on key emerging markets that are generating robust growth, like India, and those that are challenged, like China, and how they can affect the dynamics of other emerging markets.

Longer term, we expect the emerging markets gross domestic product (GDP) growth-differential with developed markets to improve from a 23-year low reached in 2022. This, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.

Finally, we view sustainable investing as a synonym for long-term investing. Our approach focuses on investing in companies that are well-positioned to embrace global, multidecadal trends, including addressing critical challenges like climate change and inclusive development. These companies also tend to be good at identifying and proactively addressing long-terms risk to their businesses. Emerging markets, we believe, are a key destination for sustainable investment themes that offer attractive opportunities for alpha generation.

View the Fund’s Top 10 holdings as of December 31, 2023. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MASGX as of 03/31/2024