Matthews Emerging Asia Fund
Period ended March 31, 2020
For the quarter ending March 31, 2020, the Matthews Emerging Asia Fund returned -37.28% (Investor Class), while its benchmark, the MSCI Emerging Markets Asia Index, returned -18.07%.
Asian equities, along with global markets, were down sharply in the first quarter. Investor sentiment declined as worries surrounding the spread of the coronavirus (Covid-19) moved from China to Europe and the U.S. The virus then continued its journey to South Asia, including India and Indonesia.
Early signs of containment appeared in North Asia led by China but many other parts of the world have struggled with containment, including the U.S., parts of Europe and South Asia. India and Indonesia suffered steeper equity price declines than countries with higher fiscal stimulus abilities, such as China. Earnings revisions have been slow to react but analysts are expected to meaningfully cut expectations beginning in Q2. We believe capital markets are in the process of digesting the uncertainty that arises from the spread of COVID-19 before moving to an understanding of the risks that arise for businesses across the region.
Notably, the market decline in many emerging Asia economies—such as Pakistan, Indonesia and Vietnam—preceded any actual health care crisis. Market participants feared that dense cities and sparse health care infrastructure in many of these economies might be particularly vulnerable to the epidemic. While these concerns are genuine, they had not come to fruition in the reporting period. We continue to monitor the human and economic impact of the virus on Asia's less developed economies.
Performance Contributors and Detractors:
China makes up close to half of the Fund's benchmark. With a focus on less developed economies within Asia, the Fund tends be underweight China, which we view as being a more developed economy. Chinese policymakers were proactive in the quarter in supporting the Chinese economy, helping Chinese equities hold up better than other parts of Asia. Our underweight to China was a detractor from performance.
Elsewhere in the region, the Fund's holdings in Vietnam, Indonesia and Pakistan also detracted from performance. These markets experienced larger stock market declines than more developed parts of Asia, such as China and South Korea, as local investors sold off equities amid coronavirus fears. The Fund's holdings in consumer discretionary, financials and consumer staples also detracted from performance. The Fund's overweight to small cap stocks was also a detractor, as investors tend to favor large companies over small companies during periods of market uncertainty.
On the other hand, the Fund's exposure to Bangladesh, which is not in the Fund's benchmark, was a net positive contributor to performance. The Fund's underweight in the energy and materials sectors were also net contributors, as was the Fund's lack of exposure to utilities. Russia and Saudi Arabia engagement in a price war over oil prices set new lows in the price of crude oil during the reporting period and our underexposure to energy and utilities benefited the portfolio.
Notable Portfolio Changes:
The Fund added no new positions in the quarter. We closed positions in Saigon Beer Alcohol Beverage, Universal Robina Corp and Vakrangee Limited. Saigon Beer and Alcohol Beverage is one of Vietnam's largest beer makers. We had been gradually trimming our exposure to Saigon Beer over the past year because the stock had performed well and appeared expensive. We finally exited the position in full during the quarter. Universal Robina Corp is the Philippines largest food manufacturer. We exited the positions because the very high valuation and difficulties the company faces in transporting goods between disparate markets. Vakrangee Limited is a technology company serving rural parts of India, including software and equipment supporting the issuance of government I.D. cards, along with other financial services. We exited the position because we lost faith in the company's present management team after the exit of a recently appointed CEO and are finding more attractive opportunities elsewhere.
Looking ahead, much uncertainty remains in terms of the potential impact of the coronavirus on emerging Asia economies. The current situation of experiencing rolling, global economic shutdowns is unprecedented in scope. Accordingly, we will continue to watch how the situation evolves. Stock prices already reflect a good deal of uncertainty, as these markets have weathered significant macroeconomic challenges. The dramatic decline in stock prices in the first quarter may have been overly pessimistic in our view, setting a very low based for generating future returns.
Risks to emerging Asia economies include potential strain on local health care systems, loss of income among daily wage earners and significant impairment of microbusinesses. On the positive side, we expect further stimulus from some governments. India's central bank, for example, could extend monetary easing, reducing the cost of capital and stabilizing demand in the near term. We also expect the rural side of India's economy to continue to improve.
We expect companies that can hold steady during the economic shock to come out stronger and more profitable. In the meantime, we see many equities as having strong growth potential from a bottom-up perspective. As valuations have corrected significantly, most businesses in emerging Asia markets are trading far below their fair value. The investable pool of stocks has become much larger, creating potential opportunities for active managers with a long-term view.
Even as the near-term outlook appears uncertain, we believe that the long-term backdrop for Asia appears favorable—in particular, lower cost of capital globally might mean better availability in coming years. Furthermore, the lower price of oil may act as a significant “tax cut” for consumers and companies in the region. We continue to believe that these factors along with extremely low valuations in many Emerging Asia markets and inherent productivity gains could provide support for a rebound in earnings.
As of 3/31/20, the securities mentioned comprised the Matthews Emerging Asia Fund in the following percentages. The fund held no positions in Saigon Beer Alcohol Beverage, Universal Robina Corp and Vakrangee Limited. Current and future holdings are subject to 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.