For the first half of 2022, the Matthews China Fund (Trades, Portfolio) returned -13.17% (Investor Class) and -13.15% (Institutional Class), while its benchmark, the MSCI China Index, returned -11.19% over the same period. For the quarter ending June 30, 2022, the Fund returned 8.90% (Investor Class) and 8.92% (Institutional Class), while the benchmark returned 3.50%.
Market Environment:
The first half of the year was negative and choppy for Chinese markets led down by the confluence of COVID-19 case spikes resulting in policy-enforced lockdowns in tier one cities, ADR delisting pricing pressures and investor worries that Russia-like sanctions could be implemented upon select Chinese companies. However, Chinese equities rebounded in the second quarter of the year following three consecutive negative quarters amid less restrictive regulatory pressure on Chinese platforms and internet giants, accommodative monetary and fiscal policy combined with positive changes to COVID lock-down protocols.
Quarantine restrictions for in-bound foreign visitors were reduced and late quarter weakness in imported commodity prices could support China’s current account while reducing inflationary pressures. Although the government’s announced 2022 GDP growth-rate target of “around 5.5%” may not be fully achieved, we believe the government will largely succeed in supporting its economy and that corporate earnings will remain some of the highest globally in 2022-23.
Performance Contributors and Detractors:
From a sector perspective, stock selection and allocation within consumer discretionary, real estate and consumer staples contributed to relative performance during the first half of the year. Among the portfolio’s consumer discretionary holdings, Pinduoduo (PDD, Financial), China’s largest agriculture-focused technology platform that connects farmers and distributors with consumers directly through its interactive shopping experience, contributed the most to the Fund’s absolute and relative performance. In light of the regulatory impact seen in the second half of 2021, more internet platform companies in China have begun to adapt to new regulations, including trying to set a path to profitability. We see more encouraging signs of monetization efforts and this, coupled with attractive valuations can potentially help the stocks to continue to recover.
On the other hand, the portfolio’s overweight in information technology and stock selection in industrials and financials sectors detracted from relative performance. Sungrow Power Supply Co. (SZSE:300274, Financial), a solar component manufacturer, detracted from performance. The A-Shares market experienced a sharp correction in growth sectors including that of the renewable sector given a general risk off appetite, coupled with COVID concerns. We continue to believe that the solar industry will continue to be a secular opportunity. Most recently, the industry is seeing strong demand from Europe given escalating energy prices in the region. Valuations for Sungrow have also corrected down to more reasonable levels and thus we remain comfortable in holding this stock in the portfolio.
Notable Portfolio Changes:
During the second quarter, we increased our exposure to the real estate sector given overall policy improvements in the sector, including progress on re-financing roadblocks and lower mortgage rates. We believe that these eased measures will start to drive contracted sales growth when COVID lockdown restrictions are eased. Property developers and management companies still trade at attractive valuations and there remains an opportunity for market consolidation for the larger and better run players. We also reduced some exposure from holdings in communication services sector, including Tencent (HKSE:00700, Financial). Tencent continues to be one of China’s most dominant internet platforms and gaming remains the largest part of its exposure. However, with a broad-base revenue moderation in gaming, coupled with weaker outlook on its advertising business, we have trimmed from this exposure to fund other opportunities.
Outlook:
The A-Shares market has recovered meaningfully since the end of April lows. It is uncertain if second quarter results (which will be weak given it will bake in the worst of the COVID lockdowns) might derail this recovery. However, we are cautiously optimistic that in the second half of this year, the conditions in China will continue to improve.
Large scale lockdowns seem a lot less probable as the government continues to become more pragmatic. Further, the party will likely do what they can to improve economic conditions ahead of the party meeting at the end of the year which may make it more likely that monetary and fiscal stimulus will be unleashed in the second half. Sentiment towards growth globally remains tepid but we believe the significantly lower valuations might warrant a re-interest in this category as well.
View the Fund’s Top 10 holdings as of June 30, 2022. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MCHFX as of 06/30/2022
| 1YR | 3YR | 5YR | 10YR | SINCE INCEPTION | INCEPTION DATE |
|---|---|---|---|---|---|
| -28.80% | 6.25% | 7.14% | 7.17% | 9.25% | 02/19/1998 |
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. Please see the Fund's most recent month-end performance.
