Matthews Emerging Asia Fund
Period ended September 30, 2019
For the quarter ending Sept. 30, 2019, the Matthews Emerging Asia Fund returned -4.96% (Investor Class), while its benchmark, the MSCI Emerging Markets Asia Index, returned -3.27%.
Asian markets were broadly down in the third quarter. In a bright spot for the region, Vietnam's GDP surprised on the upside in the third quarter by growing at the fastest pace over the past year and a half. Strong manufacturing, supported by expansion in electronics businesses, drove much of the growth. Global tech companies have announced plans to relocate or partially relocate to Vietnam. Meanwhile, foreign direct investment in Vietnam, especially from China, remains strong.
Pakistan's markets were also positive in the quarter as manufacturing sentiment ticked up and green shoots of growth started to emerge. Over the prior 18 months, Pakistan's currency dropped precipitously on concerns about the country's current account deficit, weak domestic investor sentiment and speculation that the IMF might have imposed tough terms in its economic bailout package to the country. However, sentiment in the country is improving around the margins.
Meanwhile, Indian equities fell in the quarter, along with Thailand, Malaysia and the Philippines. Much of India's underperformance occurred late July as post-election euphoria gave way to profit taking in the face of deteriorating economic data. Late in the quarter, Indian policy makers surprised markets by announcing comprehensive corporate tax cuts and other stimulative measures.
Across many parts of Asia, central bankers and policymakers are moving from defense to offensive, shifting the economic imperative to boosting growth. Many central banks, especially in South and Southeast Asia, have aggressively cut interest rates to lower the cost of funding, and there may be more reductions in coming periods. In addition, policymakers are starting to utilize fiscal tools to revitalize growth.
Performance Contributors and Detractors:
From a country perspective, the Fund's zero weight to Taiwan was the biggest detractor from relative performance in the quarter. Taiwan's markets have risen in the quarter on expectations for a pick up in the tech and semiconductor cycle. We own no securities in Taiwan, which is on the more developed end of Asia's economies, as the Fund seeks to invest in less developed parts of Asia.
In contrast, the Fund's overweight to Vietnam was a contributor to relative performance in the quarter. We see Vietnam as having a long runway for future economic growth, given its young workforce and favorable geographic location along convenient trade routes within Asia. Vietnam is not in the Fund's benchmark, so our overweight position, along with strong performance of holdings there, was a contributor in the quarter.
Turning to individual securities, L&T Finance Holdings, an Indian non-banking financial company and a relatively new holding in the portfolio, was a detractor in the quarter. India's economy continues to wrestle with the immediate negative impact of continued disruption in the financial system, particularly in the non-banking financial companies segment. While L&T Finance Holding's stock price has suffered in this environment, we continue to like the company's long-term prospects. Our meetings with the company's management team inspire confidence and we believe in their ability to continue to restructure the business and generated value over the longer term.
Meanwhile, PT Kino Indonesia, an Indonesian consumer staples company, was a contributor to performance in the quarter. The company's management team has made significant enhancements to the firm's marketing and distribution teams through recent restructuring. The firm also has a competitive range of products tailored to the needs of local consumers, giving them an edge over global brands that may not recognize similar opportunities in Indonesia's market.
Notable Portfolio Changes:
During the quarter, we rotated capital within the portfolio, adding selectively to high quality companies in the portfolio whose stock prices were weak on market sentiment. We also exited a couple of small positions, selling our shares in Bank Tabungan Pensiunan, an Indonesian commercial bank, and Matahari Department Store, an Indonesia retailer. In both cases, we felt that each company's management teams and business models were not adapting fast enough to changes within their respective industries.
U.S.-China trade tensions remain mostly unresolved, but less developed parts of Asia have had little direct negative impact from the sparring giants. Local investors tend to make up the lion's share of stock market participation in frontier Asia economies, creating an inherently more domestic focus. Accordingly, we believe these economies offer a welcome source of diversification for investors looking to capture differentiated portfolio exposures.
Notably, macroeconomic cycles in frontier Asia tend to be long and slow, with many diverse drivers. While less developed parts of Asia can be highly impacted by dramatic shifts in global energy prices, they otherwise tend to march to the beat of their own drums. In many instances we are seeing very low valuations and we are starting to see early signs of optimism in areas such as Pakistan and Bangladesh.
In Sri Lanka, citizens are anticipating upcoming presidential election, occurring later this year. Candidates have started their campaigns, creating a sense of optimistic that there might be some positive political changes and possible economy friendly reforms coming down the road. A recovery in local sentiment is often a first step toward increasing economic momentum and better stock market returns.
Elsewhere, elections in India and Indonesia resulted in wins for the incumbents, adding a sense of political stability in both countries. With elections concluded, reform cycles in both countries could get a boost. Looking ahead, we expect less-developed markets to offer attractive growth potential over the long term as rising domestic demand for consumer goods and services has the potential to drive solid revenue and strong earnings growth. In many instances valuations are at attractive levels, providing a good foundation for potential future returns.
As of 09/30/2019, the securities mentioned comprised the Matthews Emerging Asia Fund in the following percentages: L&T Finance Holdings, Ltd. 2.4%; PT Kino Indonesia 3.7%. The Fund held no positions in Bank Tabungan Pensiunan and PT Matahari Department Store. Current and future portfolio holdings are subject to change and risk.
Visit our Glossary of Terms
page for definitions and additional information.
The views and opinions in this commentary were as of the report date, subject to change and may not reflect current views. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund's future investment intent. It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein. The information does not constitute a recommendation to buy or sell any securities mentioned.
The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Neither the funds nor the Investment Advisor accept any liability for losses either direct or consequential caused by the use of this information.