Market Environment
China's difficulties are well documented. Since the second quarter, consumer sentiment continued to deteriorate and month-on-month property prices continued to decline. There is de-premiumization occurring as consumers are spending but they're much more selective in what they are
spending on.
Despite this, many Chinese companies showed resilience. While earnings have disappointed in many areas, there were notable exceptions, particularly in e-commerce, where there has been a focus on the bottom line
and improvements in profitability, rather than purely on sales growth. Companies more directly tied to China's domestic economy faced greater challenges. Among retailers, we are seeing margins coming down as companies try to maintain volumes.
While we believe valuations are generally compelling, earnings projections are changeable and some stocks can remain attractive while others can become expensive. Toward the end of the quarter the markets rallied
after the central bank launched a broad and significant stimulus package.
Contributors and Detractors
For the quarter ended September 30, 2024, the Matthews China Fund (Trades, Portfolio) returned 27.48%, (Investor Class) and 27.42% (Institutional Class) while its benchmark, the MSCI China Index, returned 23.65% over the same period.
On a sector basis, the top three contributors to relative performance were financials and real estate due to stock selection and utilities due to zero allocation. The top three detractors were consumer discretionary, health care and energy due to stock selection.
The largest contributors to absolute performance included Alibaba Group (BABA, Financial), an e-commerce platform company, Meituan (HKSE:03690, Financial), China's largest food delivery service and internet platform company, and JD.com (JD, Financial), a leading e-commerce platform.
The top three detractors included PetroChina (SHSE:601857, Financial), one of China's largest state- owned oil and gas companies, Orient Overseas (International) Limited (HKSE:00316, Financial), a Chinese industrials company and MMG (HKSE:01208, Financial), a global metal mining company.
Outlook
The stimulus moves announced by China's central bank included measures to boost the stock market, support the real estate sector and add liquidity in the economy. We view them as the broadest and most aggressive set of proposals since China's economy started to face challenges more than three years ago. However, it will take time to see if the measures provide a sustainable catalyst for economic recovery or whether further stimulus is warranted.
We believe that Chinese equities have been priced too cheaply amid all the macro negativities. We have seen earnings growth this year but it has not been fully reflected in stock market pricing. As such, we don't think drastic improvements in the economy are needed for the markets to do quite well.
Meanwhile, we expect volatility to remain in China's markets, particularly as we approach and pass through the U.S. election.
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.
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange rate fluctuations, a high level of volatility and limited regulation. Investing in emerging markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. 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.
The views and opinions in the 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.
