For the first half of 2022, the Matthews Asia Dividend Fund returned -23.97% (Investor Class) and -23.92% (Institutional Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned -16.99% over the same period. For the quarter ending June 30, 2022, the Fund returned -10.11% (Investor Class) and -10.09% (Institutional Class), while the benchmark returned -11.78%.

Market Environment:  

During the first half of 2022, a more hawkish policy stance adopted by the U.S. Fed and the European Central Bank has raised the specter of a potential hard landing, and global equity markets including Asia have reacted negatively. MSCI AC Asia Pacific Index returned -17%, with the worst performance coming from markets with higher sensitivity to U.S. and Europe economies, including Japan, South Korea and Taiwan.  Indonesia was the only market in the Index that managed to stay flattish during the six months. The country enjoys fiscal and economic tailwinds from robust commodity prices and reopening of its economy from COVID lockdowns.  

After a decline of 14% in the first quarter due to the Shanghai lockdown and perceived risk contagion from the Russia/Ukraine conflict, China outperformed global equity markets and gained 2.3% in the second quarter. Market confidence on corporate earnings and consumption growth in the medium term was boosted by a series of economic stimulus announcements and the government’s pivot towards a more pragmatic approach with its COVID measures.

Performance Contributors and Detractors:

From a country perspective, our stock selection in Japan and China detracted from relative performance during the first half of 2022. Dividend growth holdings in Japan were hurt by worries that inflation and potential economic recession in developed countries might impact the medium-term growth outlook. Our holdings in China rebounded in the second quarter from their steep sell-off earlier in the year, after China reoriented its policies towards restoring growth, by fine tuning its COVID measures and announcing a series of stimulus. On the other hand, our stock selection in South Korea and Singapore contributed positively in the first half.

From a sector perspective, poor stock selection in the consumer discretionary sector detracted the most from relative performance. Our portfolio’s holdings exposed to discretionary consumer goods sold in developed countries were hurt by weak consumer sentiment. Additionally, holdings in auto parts companies were weighed down by the supply chain disruptions and sharp commodity price spike since the Russia/Ukraine conflict. Conversely, an underweight allocation and stock selection within information technology contributed the most to the relative performance.

Turning to individual stocks, Breville Group, a premium household appliance manufacturer headquartered in Australia, was one of the largest detractors to performance in the period. The company experienced a sharp pull-back in share performance recently due to concerns on weakening consumption outlook in North America and Europe. We believe the company is now attractively priced at below 14x forward EV/EBITDA with its motivated management team, attractive product innovation and continued market share gains over the long term. On the positive side, our holding in BOC Aviation, a leading player in the global aircraft operating leasing market, was the top contributor to performance. The company demonstrated its top-tier management quality and capital resilience over the past few years and is well positioned for the industry recovery ahead.

Notable Portfolio Changes:

During the reporting period, we increased our allocation to companies that benefited from the change in interest rate regime and companies with exposure to re-opening in most Asian economies. We took advantage of the sell-off in China to add to high-quality growth holdings with attractive valuation. For instance, we initiated positions in a few Chinese internet stocks, namely Netease (a global mobile and PC gaming franchise), JD.com (a leading Chinese e-commerce player) and Alibaba Group (the largest e-commerce platform in China with enterprise services such as cloud computing). We observed major headwinds including regulations and excessive earnings expectation that caused the severe de-rating on these stocks started to abate. With more disciplined investment plans compared to the past, the large Chinese internet companies are increasingly generating abundant positive free cash flow, and their balance sheet is flushed with high level of net cash. A few of them started conducting large share buybacks and/or paying dividends for the first time, sending an interesting signal underscoring the value in those businesses. We believe the risk/reward profile on Chinese internet stocks now looks attractive.

On the flip side, as the impact from an aggressive U.S. monetary tightening on the global economy remains quite uncertain, the portfolio exited several positions whose underlying businesses are more sensitive towards the global consumer demand situation and commodity prices. Those included Shiseido (a cosmetics company in Japan), Posco (a steel maker in South Korea), and Anritsu (a mobile device-testing equipment maker in Japan).

Outlook:

The overall global growth outlook remains murky with risks of protracted inflation and tight global liquidity amid weak economic growth. However, it is worth noting that wage inflation in most Asian countries remains quite moderate and commodity cost pressure has started to soften as well, allowing more accommodative monetary policies in these Asian countries than their developed market counterparts.  

In particular, Chinese fiscal and monetary support combined with more lenient zero-COVID policy implementation recently provided a positive catalyst for investors to refocus on long-term bottom-up corporate fundamentals for investment opportunities in the market. Admittedly, any major resurgence of COVID and resulting economic weakness in China will prolong the restoration of consumer confidence and delay corporate capital investments.

In this environment, the Fund’s focus remains steadfast—looking for businesses with a strong ability to fend off inflation cost pressures and maintain their earnings and dividend growth outlook.

View the Fund’s Top 10 holdings as of June 30, 2022. Current and future holdings are subject to change and risk.

Earnings growth is not representative of the Fund’s future performance.

There is no guarantee that a company will pay or continue to increase dividends. Dividend growers represent dividend-paying companies that can grow their dividend payouts over time. Dividend payers represent dividend-paying companies that pay steady, consistent dividends over time.

Average Annual Total Returns - MAPIX as of 06/30/2022