For the first half of 2022, the Matthews Asia ESG Fund returned -11.91% (Investor Class) and -11.77% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -16.14% over the same period. For the quarter ending June 30, 2022, the Fund returned 0.74% (Investor Class) and 0.89% (Institutional Class), while the benchmark returned -8.90%.

Market Environment:

The continually higher-than-expected inflation reads both in the U.S. and European Union have led the market to increasingly expect a steeper rate-hike cycle. The U.S. Federal Reserve hiked its rate by 75 basis points (0.75%) at its June meeting, the first such move in almost three decades. Also attendant was the view that this steeper pace of tightening may lead to a recession down the road. With no end in sight for the Russian invasion of Ukraine, the prices in the oil and gas markets remain elevated notwithstanding periodic pullbacks predicated on worries of recession.

That said, in China, after several quarters, sentiment has turned a corner with an expectation that the regulatory risk has peaked and the Chinese government is taking a more pragmatic approach to implementing its zero COVID policy and aiding economic activity through a stimulus package.

Indonesia was the strongest performing market in the first six months and the only major market to deliver positive returns, while South Korea and Taiwan were the worst performing markets. In the second quarter, China/Hong Kong was the top performer and South Korea and Taiwan were again the bottom performers.

Asian currencies weakened against a surging U.S. dollar during the second quarter but have held up relatively well compared to other developed market currencies. The South Korean won depreciated the most followed by the Thai baht, while the Singapore dollar and the Indonesian rupiah did relatively better.

Performance Contributors and Detractors:

On a country basis, China, India and South Korea were major contributors to relative performance during the first half of 2022 primarily driven by stock selection. On the other hand, our underweight and stock selection within Taiwan and stock selection within Indonesia detracted from relative performance.

From a sector perspective, good stock selection in industrials and health care were the biggest drivers of relative performance, while poor stock selection in information technology and financials detracted performance.

Turning to individual holdings, Full Truck Alliance was a top contributor to the Fund’s relative performance in the first half of the year. The company is a leading digital-freight platform in China and the world connecting shippers with truckers online, enabling faster, more efficient order listing and matching and creating broader access while at the same time lowering shipping costs and carbon emissions by reducing empty miles. During the period, a key part of the Cyberspace Administration of China (CAC) cybersecurity review that started in July 2021, during which time Full Truck was not allowed to register new users, was resolved. The company was again allowed to register new users thereby lifting a major overhang on stock price performance. We continue to take a constructive view of Full Truck’s market positioning, growth prospects, social and environmental value-add.

On the other hand, semiconductor companies Andes Technology and Micron Technology were among the top detractors to relative performance due to rotation away from companies that derive a significant part of their value from long-term growth amid a sharply rising interest rate environment and near-term concerns about memory demand outlook, respectively.

Notable Portfolio Changes:

There were no meaningful additions to the portfolio during the second quarter but we initiated a small position in Zhejiang Hangke, a leading Chinese battery cell-making equipment manufacturer. The company has a diversified customer base and is expected to benefit from fast-growing battery cell manufacturing capabilities globally. There were no exits during the quarter.

Outlook:

Looking ahead, the Fed’s pace and scope of interest rate hikes and quantitative tightening and the market’s expectation of its evolution remain the most important variables to watch and will have near-term implications for regional, sector and style performance. Russia’s invasion of Ukraine and the attendant impact on energy prices also needs careful watching.

We expect corporate earnings to moderate in 2022 and remain watchful about the impact of inflation on financial results. Across the region we see sufficient liquidity, and while we have not seen as much uptake in credit, any meaningful pick up in credit issuance should further support economic growth. In many parts of Asia, COVID-19 vaccination is progressing well and provides hope for economic activity normalization in the coming quarters but China’s zero-COVID policy and its variants need monitoring.

Over the mid-to-long term, we continue to believe that companies that address critical challenges such as climate change and inclusive development will continue to thrive. And for investors interested in sustainability themes, including reducing carbon emissions, alleviating poverty and creating greater financial inclusion in the developing world, Asia remains a key investment destination, in our view. To tackle sustainable themes globally, we believe we need to include the world’s most populous economies, many of which lie in Asia.

As the global economy embarks on a post-pandemic recovery path and markets contend with macro headwinds and volatility, we believe there are attractive opportunities for alpha generation throughout our large, diverse, sustainable investment universe.

View the Fund’s Top 10 holdings as of June 30, 2022. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MASGX as of 06/30/2022