Market Environment
- China's market performed well in the second quarter, helped by positive sentiment generated by government initiatives to support the real estate sector and strong exports which compensated for lackluster domestic consumption.
- The government's move to enable provinces to buy real estate inventory from developers and use it for social housing has been notable as it should begin to take the stress off developers' balance sheets and provide a meaningful tailwind. That said, China remains an economy with many challenges and macro indicators remained mixed. On the retail side there has been improvement, but overall consumer sentiment is still quite weak.
- In the quarter, we focused on companies that are producing better earnings. In large sectors, like digital and e-commerce companies, there have been improvements on the revenue side. More generally, margins are starting to widen, and some companies are making narrower losses in some of their higher growth areas.
Contributors and Detractors:
- For the quarter ended June 30, 2024, the Matthews China Fund (Trades, Portfolio) returned 2.39%, (Investor Class) and 2.48% (Institutional Class) while its benchmark, the MSCI China Index, returned 7.16% over the same period.
- On a sector basis, the top three contributors to relative performance were health care and energy due to stock selection, and consumer discretionary due to an underweight allocation and stock selection. The top three detractors were financials, industrials and information technology (IT) due to stock selection.
- The largest contributors to absolute performance during the quarter included Tencent Holdings (HKSE:00700, Financial), an online gaming, and social media conglomerate, Meituan (HKSE:03690, Financial), China's largest food delivery service and internet platform company, and PetroChina (SHSE:601857, Financial), one of China's largest state-owned oil and gas companies. The top three detractors to performance included Wuliangye Yibin (SZSE:000858, Financial), a baijiu distillery, Wingtech Technology (SHSE:600745, Financial), a semiconductor and communications equipment manufacturing company, and China International Travel Service, a retailer of duty-free goods.
Outlook
- China continues to face several economic and external headwinds; however, we see opportunities in stocks that are improving earnings and in companies with robust dividend yield support and share buybacks.
- While there might be moderate catalysts for growth on the macro front, in our view there is unlikely to be a big fiscal or monetary stimulus for the economy as such moves in the past have left China with large debt burdens.
- In terms of geopolitics, and particularly related to the upcoming U.S. presidential election, we think a lot of expectations are priced into the markets but there will likely be volatility as signals emerge over the potential winner. It could be that the election provides an opportunity to reduce positions in China or, as we near the election, valuations in China equities may decline and the market may overreact to the election outcome, in which case there could be opportunities to increase exposure.
All performance quoted is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund's fees and expenses had not been waived. For the Fund's most recent month-end performance visit matthewsasia.com
The views and opinions in the commentary were as of the report date, subject to change and may not refect current views. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions refect 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 proftable 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.
