Period ended 30 September 2018
For the quarter ending 30 September 2018, the Matthews China Fund returned -9.85% while its benchmark, the MSCI China Index, fell -7.42% over the same period.
The third quarter witnessed a significant China market sell-off on worsening trade relations between China and the U.S. Two rounds of trade tariffs covering approximately US$250 billion worth of Chinese imports into the U.S. went into effect. We believe that the market may have priced in the worst case scenario that additional import tariffs will be imposed in 2019 and remain for an extended period of time. The impact of these tariffs to China, however, may be muted in the short run as China's economy today relies much less on trade. In fact, the dent on China's GDP growth may only be less than 1%, demonstrating that the country's services and consumption industries are now more significant growth drivers. We realize, however, that there could be potential knock-on effects to consumer sentiment given the weak market performance. Businesses could also be impacted as they may have less incentive for further investment. To this end, we monitor domestic income growth and consumption trends closely and have so far not found reason to believe that China is experiencing a significant consumption slowdown. Overall, we remain cautious on near-term political developments but continue to be optimistic about long-term growth prospects, and await the developments of scheduled talks in November between President Donald Trump and President Xi Jinping.
Performance Contributors and Detractors:
During the third quarter, the Fund's holdings in the financials and energy sectors performed well, while our holdings in information technology, consumer discretionary and industrials sectors did poorly. For the period, the Fund underperformed its benchmark due to stock selection, particularly in the industrials sector. Within industrials, environmental services provider China Everbright International declined sharply in August after the firm announced a large rights issue to enlarge its capital base. In information technology, shares of social network and online gaming provider Tencent corrected. The company was our largest detractor to performance after China temporarily halted video game license approvals and issued new regulations to limit the amount of time minors spend playing online games. To move the company forward, Tencent recently undertook a major restructuring to improve the integration of its rich user traffic data and advanced analytics, and strengthen its services to corporate customers. In light of the firm's formidable platform and strong execution, we continue to hold this position and closely monitor its restructuring progress.
Among the top contributors to Fund performance during the quarter were two of our core insurance holdings: Ping An Insurance and AIA Group. These holdings delivered better-than-expected results due to their superior distribution and underwriting capabilities. In energy, shares of China Petroleum & Chemical (Sinopec), a large Chinese integrated energy and chemical producer, outperformed. The company posted strong earnings and cash flow, due to the rising oil price and a favorable pricing environment for refined petroleum and petrochemical products.
Notable Portfolio Changes:
During the quarter, we initiated a position in New China Life Insurance, a large Chinese life insurance provider. The firm has shifted its strategic focus from scale to profitability, and has demonstrated improving new business margins and increasing sales in protection-oriented products. The company's valuations also became attractive as its stock price suffered a sharp pullback earlier in the year. We believe New China Life will continue to be a major beneficiary of the structural growth of the country's life insurance industry as more people join the middle class and affluence rises. We exited our position in Zhejiang Dahua Technology, a major Chinese security and surveillance equipment provider, due to the company's relatively high overseas exposure amid a climate of intensified U.S.-China trade friction.
Market sentiment toward China was quite weak in the third quarter given ongoing political conflicts. At the same time, earnings growth expectations for the market continue to trend in the range of the low teens, largely in line with expectations from the start of the year. Valuations also continue to be attractive at high single-digit price-to-earnings multiples. We find that this is an opportune time for us to prune our portfolio and pick up quality companies at good prices. Looking ahead, we believe that besides dealing with the trade conflicts, China will also continue to further deleverage its economy. We see the fact that China is able to manage both of these challenges without further plans for major stimulus as an indicator that its underlying economy is still on solid footing.
Performance figures discussed in any of the Fund Manager Commentaries reflect that of the Institutional Accumulation Class Shares and have been calculated in USD, including ongoing charges and excluding subscription fee and redemption fee investors might have to pay. Performance details provided for the Fund are based on a NAV-to-NAV basis, with any dividends reinvested, and are net of management fees and other expenses. Past performance information is not indicative of future performance. Investors may not get back the full amount invested.
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. Matthews International Capital Management, LLC (“Matthews Asia”) and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.
Information contained herein is sourced from Matthews Asia unless otherwise stated. The views and opinions in this commentary were as of the report date, subject to change and may not reflect the writer’s 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.
Investors should not invest in the Fund solely based on the information in this material alone. Please refer to the Hong Kong Offering Document for further details of the risk factors.
Sources: Brown Brothers Harriman (Luxembourg) S.C.A, Matthews Asia, FactSet Research Systems, Bloomberg