Three Extraordinary Years in Emerging Markets. Part 2

Portfolio manager John Paul Lech explores the defining changes of the last three years. Here he examines how the war in Ukraine tested his approach to managing geo-political and portfolio risk.


Key Takeaways

  • The exuberance of the pandemic rally favored companies that lacked profitability, cash flow or a pathway to it. Liquidity can keep things going but it doesn’t generate a self-sustaining business model.
  • The war in Ukraine altered the dialogue around energy and indelibly changed the risk profile of companies whose states are known for pursuing kinetic action. These changes are likely to be long lasting.
  • Interest rates don’t matter until they do. As rates rise, companies with high leverage have to roll over or replace existing debt with higher yielding instruments, challenging margins.

On April 30, 2020, we launched the Matthews Emerging Markets Equity Fund (MEGMX). The ensuing three years saw more changes in emerging markets than the whole of the previous decade. It tested our approach and our processes. I’d like to reflect on those changes and on the market environments that dominated, how our process guided us through and on the lessons we’ve learned.

Three distinct narratives unfolded that, in our view, impacted—and in some cases upended—many approaches to investing in emerging markets and equities generally. At the outset there was COVID-19, the first pandemic in 100 years; second was the war in Ukraine, the biggest ground conflict in Europe since World War II; and third was the rise in interest rates after almost two decades of close-to-zero borrowing costs. The types of companies that succeeded or collapsed during each of these narratives were very different.

The war in Ukraine: energy and sovereign risk

We didn’t think Russia would launch a full-scale invasion of Ukraine for the simple reason that the material constraints of trying to take control of a country with more than 40 million people were too much and likely to be too costly. It seemed something would happen but it would be limited in scope and short in duration. The rationale was sound but the call was wrong. We weren’t alone. It’s been reported that even senior members of Russia’s military were surprised by the scale of the offensive.

“The war appears to have altered the dialogue around energy and the reaction of governments to the invasion has indelibly changed the risk profile of companies.” John Paul Lech, Portfolio Manager

The invasion of Ukraine set a precedent for sanctions and saw a willing-and-able creditor forced into default. We sold two positions in Russia before the invasion, not because we called it, but because in a buildup of stress you’ve got to think about what you own and why. It made sense to exit stock with the smallest capitalization which seemed likely to suffer if liquidity got constrained. We also sold a gold company. While gold is often viewed as a hedge for extreme market outcomes, we didn’t think it made sense to hold something that provides comfort in times of stress in a place that might be generating that stress. In addition, we bought an energy company in Latin America and a bank in the Middle East that we thought would provide a countervailing impact on the portfolio in the event of a big invasion.

The war appears to have altered the dialogue around energy and the reaction of governments to the invasion has indelibly changed the risk profile of companies whose states are known for pursuing kinetic action. We think these changes are likely to be long lasting and we’ve incorporated them into our analysis going forward.

The surest way to generate positive returns is to make bold predictions that turn out to be correct. But often the best-performing fund in a particular market is tightly wound around a factor and history teaches us that markets are full of surprises. Guessing the big picture of what’s next rarely works over the long term.

Our approach is to focus on great companies. We seek diversity in what will work, with the commonality that great companies tend to survive and thrive in the long term. Our aim is to perform through a variety of market environments and doing so requires tempering a desire to predict what’s next and then fitting the portfolio to that narrative. We try to provide resilience from holding a diverse set of underlying companies and we will bring to the next three years what we have learned over the last three extraordinary years.

John Paul Lech
Portfolio Manager
Matthews Asia

Important Information

You should carefully consider the investment objectives, risks, charges and expenses of the Matthews Asia Funds before making an investment decision. A prospectus or summary prospectus with this and other information about the Funds may be obtained by visiting Please read the prospectus carefully before investing as it explains the risks associated with investing in international and emerging markets.

The value of an investment in the Fund can go down as well as up and possible loss of principal is a risk of investing. Investments in international, emerging and frontier markets involve risks such as economic, social and political instability, market illiquidity, currency fluctuations, high levels of volatility, and limited regulation. Additionally, investing in emerging and frontier securities involves greater risks than investing in securities of developed markets, as issuers in these countries generally disclose less financial and other information publicly or restrict access to certain information from review by non-domestic authorities. Emerging and frontier markets tend to have less stringent and less uniform accounting, auditing and financial reporting standards, limited regulatory or governmental oversight, and limited investor protection or rights to take action against issuers, resulting in potential material risks to investors. Investing in small- and mid-size companies is more risky than investing in larger companies as they may be more volatile and less liquid than large companies. In addition, single-country and sector funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific industry, sector or geographic location. Pandemics and other public health emergencies can result in market volatility and disruption.



The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies. Past performance is no guarantee of future results. 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. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.