Matthews Pacific Tiger Fund First Quarter 2014 Commentary
Asia’s capital markets endured a rocky start to the year as investors continue to wrestle with an environment of slowing growth in China. This has been partly offset by a tempering of concerns over the impact of the U.S. Federal Reserve’s tapering policies on economies like India and Indonesia.
Recent economic indicators coming out of China seem to suggest that the economy has lost some steam. Barring any broad-based stimulus program, it is clear that a more constrained funding environment is already testing weaker business models across a variety of industries in China. As a result, Chinese equities continued to detract from absolute returns for the strategy.
One of the outcomes of a more difficult business environment has been a pickup in restructuring, and mergers and acquisitions activity. As if on cue, several of the portfolio’s holdings in China, and across the region, have been active in acquiring companies. On the one hand, the acquisitions are reflective of stronger balance sheets among the portfolio’s companies, and a desire to build scale and know-how. However, there are instances in which we think the risks of executing the transactions are significant and the desired objectives may not be met. In one such instance, we reduced our position in Yuanta Financial Holdings (TPE:2885) as we believe their strategy of expanding into the Korean brokerage industry may not achieve the desired growth.
The portfolio’s Indian and Indonesian holdings were the largest contributors to performance in the first quarter. Gradual improvements in certain macroeconomic indicators, such as their current account deficits, have minimized anxieties (given the potential for reduced foreign inflows) over India and Indonesia. While stabilizing deficits have helped both the rupee and the rupiah, the prospect of a favorable outcome in the upcoming general elections has catapulted equity prices higher. Some of the portfolio’s holdings that may benefit from a recovery in investment activity, like Container Corporation of India, were among the leading contributors to the gains during the quarter.
Within the business and investment community, there is a growing fixation over upcoming election results, which seems to be undermining the role of various institutions, such as central banks, in facilitating balanced growth within the economy. At the very minimum, we have noticed a change in the conversation leading up to the elections in India, from identity and entitlement-based issues to growth and governance. We continue to believe that both India and Indonesia offer an opportunity to invest in domestically oriented businesses with secular, long-term growth prospects. However, we continue to be steadfast in seeking businesses that can navigate various political and economic climates, instead of focusing narrowly on election results.
Looking ahead, concerns over an impending collapse in China seem to be overdone. Similarly, expectations of a sharp recovery in regional economic growth also seem misplaced as it may take longer for policy-led initiatives to translate into underlying economics. Meanwhile, valuations across a variety of sectors are at or below long-term averages; although there is wide dispersion between sectors. For example, Internet-related businesses continue to trade at levels that leave little room for disappointment, prompting us to trim some of the holdings. By contrast, we continue to like the long-term prospects for sectors like consumer discretionary where a cyclical slowdown is leading to more acceptable valuation levels.
The views and opinions in this commentary were current as of March 31, 2014. 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.
Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy.
As of 3/31/2014, the securities mentioned comprised the Matthews Pacific Tiger Fund (Trades, Portfolio) in the following percentages: Yuanta Financial Holding Co., Ltd., 0.2% and Container Corp. of India, Ltd., 1.5%. Current and future portfolio holdings are subject to change and risk.
Performance and distribution figures discussed in any of the Manager Commentaries reflect that of the Investor Class Shares.