For the quarter ending September 30, 2023, the Matthews Asia Dividend Fund returned -5.01% (Investor Class) and -4.94% (Institutional Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned -2.65%.

Market Environment:

The last quarter was a challenge for most major markets, both developed and emerging. Resilience in the U.S. fueled concerns that the Federal Reserve will sustain higher for longer interest rates and this pressured risk assets globally. In addition, a rise in oil prices and renewed strength in the U.S. dollar have worked against emerging markets. Investors are also starting to re-evaluate the chances of a liquidity-induced recession in developed economies which could hamper demand for emerging market-originated exports. In China, economic data continued to disappoint while negative news about the real estate sector re-emerged. On a more optimistic note, the cadence of policy announcements aimed at supporting China’s economy seems to suggest that the government is keen on getting its key sectors moving again. Elsewhere, India’s equity market performed strongly in the period helped by a robust macroeconomic backdrop, resilient corporate earnings and solid inflows.

Performance Contributors and Detractors:

At the regional level, the portfolio’s stock selection in China/Hong Kong was the largest detractor to relative performance in the period. Internet platforms such as JD.com and Tencent Holdings among some other economically sensitive holdings hurt performance. Stock selection in Japan was also negative as certain holdings across a variety of sectors fell throughout the quarter, and some of our holdings in India struggled to participate in that market’s move upward. On the other hand, the portfolio’s off-benchmark allocation to the frontier market of Vietnam was the top contributor to relative returns while stock selection in South Korea was also helpful as the portfolio’s more limited holdings declined less than the market on average, aided by a lack of exposure to areas such as those linked to electric vehicle batteries.

At the sector level, stock selection in financials and consumer discretionary weighed on relative performance. In contrast, an underweight and stock selection within information technology (IT) and stock selection in consumer staples contributed to returns.

At the holdings level, AIA Group was the largest detractor to total returns during the period. Although the company continued to deliver what we believe was robust value of new business growth in the first half, the stock has performed poorly in recent months. This is potentially due to concerns over the growth and margin profile of its expansion in China combined with overall fund flow in Asia equity markets negatively impacting the stock. Kakaku.com, a Japanese internet company that includes a price comparison platform as well as other services such as restaurant promotions, declined as results remained weaker than hoped. Fellow Japanese company Keyence, a leader in industrial automation and inspection equipment, also sputtered on earnings given the softer backdrop for automation demand and some areas of rising costs. Conversely, Vietnamese IT services company FPT Corp was the biggest contributor to total returns as the company has been seeing reasonable earnings growth momentum, particularly within digital transformation. Australian refinery, distributor and retailer Ampol also gained amid decent results despite a refinery outage given growth in non-fuel and international earnings. Disco Corp., a Japanese leader in precision processing equipment for cutting, grinding and polishing in the technology industry, moved up further in part due to its exposure to higher growth areas such as generative AI and power semiconductors.

Notable Portfolio Changes:

We exited Japanese life insurer Dai Ichi Life during the quarter. Although not expensive, we believe that the company has somewhat limited sustainable growth drivers and that these funds are better utilized elsewhere within the portfolio.

Outlook:

Questions remain over the economic outlook in the U.S. as markets digest the prospect that the Federal Reserve will maintain a policy of higher rates for longer. This could also impact certain Asian markets given they may have less scope for monetary easing while facing tight funding costs. China is still dealing with many challenges that shouldn’t be dismissed, including a soft property market, liquidity issues among developers, low consumer confidence and what appear to be dashed entrepreneurial spirits. This economic weakness may allow for some policy easing in China as demonstrated by recent moves. This, alongside significant household savings, provides a degree of comfort at a macroeconomic level. At a microeconomic level, weak sentiment toward the Chinese market, a reasonable base for earnings comparisons in 2024 and appealing valuations are also reasons to be constructive. In Japan, near-term projected earnings growth remains acceptable, and it is the combination of potentially better shareholder returns and the increase in inflation that justify some continued optimism. For the region more broadly, valuations are moderate. The MSCI Asia Pacific Index trades at 12.4x FY24 P/E with over 13% growth expected for next year on current estimates.  While this appears reasonably attractive, the macroeconomic backdrop remains uncertain and potentially volatile in our estimation. We continue to focus on keeping the portfolio invested in those companies that we believe can manage through such an environment as well as serve our clients well over the long term.

Top 10 holdings as of September 30, 2023. Current and future holdings are subject to change and risk. Dividends are not guaranteed and may fluctuate.

Average Annual Total Returns - MAPIX as of 09/30/2023