Matthews Emerging Asia Fund

Period ended June 30, 2019

For the first half of 2019, the Matthews Emerging Asia Fund returned -1.68% (Investor Class), while its benchmark, the MSCI Emerging Markets Asia Index, returned 9.87% over the same period. For the quarter ending June 30, 2019, the Matthews Emerging Asia Fund returned -6.47% (Investor Class), while the benchmark returned -1.13%.

Market Environment:

The first six months of 2019 were generally positive for Asian and emerging markets. China's equity markets (up 13.08%) were the top performers in the region for the first half, despite trade tensions. Many other Asian equity markets also enjoyed gains in the period, including Taiwan, South Korea, Malaysia and Thailand. Pakistan's equity market was the weakest performer in the region (down -13.82%).

As economic data in the U.S continued to soften, the U.S. Federal Reserve began to use language suggesting the potential for future rate cuts. The prospect of lower U.S. rates has provided support to Asian and emerging market currencies against the U.S. dollar as well as allowed emerging market central banks to ease monetary conditions supporting their economies.

Amid trade tensions in the period between the U.S. and China, many U.S. manufacturers that have traditionally operated in China looked to less-developed parts of Asia for opportunities to relocated operations. Vietnam, in particular, has received increased interest from companies looking to move production over the long term.

Performance Contributors and Detractors:

A significant detractor from performance in the first half of the year were the Fund's holdings in Pakistan. Pakistan's equity markets continued to suffer negative sentiment as its economy grappled with a weak currency, higher inflation, weaker growth and higher interest rates. But consumption continues apace in some areas of spending. The IMF also announced a financial-assistance package of US$6 billion to help the country stabilize its economy. Pakistan's economy has gone through a dark tunnel, but with reforms it could, in our view, emerge stronger and more resilient.

A contributor to performance, meanwhile, was stock selection in Indonesia. Among the Fund's top-performing securities, three were Indonesian financial companies. Bank Tabungan Pensiunan Nasional Syariah, Bank Mandiri and Adira Dinamika Multi Finance each generated double-digit returns in the first half. Bank Tabungan Pensiunan Nasional Syariah is a sharia commercial bank serving millions of low-income families in Indonesia, growing its revenues as incomes rise. Bank Mandiri is the largest bank in Indonesia, offering diversified lending and financial services. And Adira Dinamika Multi Finance provides consumer financing for motorcycles and cars.

Notable Portfolio Changes:

During the second quarter, we initiated a new position in Commercial Bank of Ceylon, a Sri Lankan bank with operations in Sri Lanka, Bangladesh and Maldives. We also exited positions in The City Bank, a Bangladeshi private bank; Dinh Vu Port Investment, a Vietnamese port services provider; and Hum Network, a broadcasting company based in Pakistan. We used proceeds from the sales of these securities to rotate capital within the portfolio, selectively adding to companies with the most attractive valuations and long-term growth potential.


Looking ahead, geopolitical risks in the Middle East could lead to higher oil prices should tensions between Iran and the U.S. or U.K. escalate. Higher oil prices would present challenges for many emerging economies that import most of their energy. On a positive note, 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. Elsewhere, Vietnam continues to perform well, having a strong domestic economy and strong domestic demand. Also, we are seeing continued foreign direct investment in Vietnam, which could keep its economy in good stead. The Fund remains focused on the least-developed economies in Asia, which we believe have attractive structural growth potential over the long term.

As of 6/30/2019, the securities mentioned comprised the Matthews Emerging Asia Fund in the following percentages: PT Bank Tabungan Pensiunan Nasional Syariah 2.7%; PT Bank Mandiri Persero 3.0%; PT Adira Dinamika Multi Finance 2.0%; Commercial Bank of Ceylon PLC 0.8%.The Fund held no positions in The City Bank, Ltd., Dinh Vu Port Investment & Development JSC, and Hum Network, Ltd. Current and future portfolio holdings are subject to risk. 

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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.