Yu Zhang, CFA, Portfolio Manager at Matthews Asia
Breaking the upward trend of the 2017 market rally, Asia’s equity markets were significantly more volatile during the first quarter of 2018. As a result the MSCI All Country Asia ex Japan Index returned only 0.7% over the quarter.
Uncertainties surrounding the U.S. interest rate cycle and the specter of a full-blown trade war between the U.S. and China became the two main sources of the sharp market volatility. Both factors have negatively impacted the share performance of Asia equities, despite improving fundamentals and strong earnings delivery.
Whether the volatility seen during the quarter is a blip or a sign of things to come is hard to say. In terms of our strategy, we think it is prudent to increase the portfolio’s defensiveness by introducing additional high dividend-yield stocks, with stable underlying cash flow, to balance the portfolio’s exposure to dividend growth names.
The Matthews Asia ex Japan Dividend Fund balances two types of stocks. We have traditional dividend stocks, typically these are large-cap, mature businesses with fairly steady dividends. This type of stock adds stability to the portfolio and allows us to look more aggressively for the growth opportunities that make up the second type of stock. These are often small- and medium-cap companies that exhibit much higher growth potential. Over the last quarter the Fund’s allocation to small-cap companies has generated positive performance.
We have, however, increased portfolio exposure to sectors with stable cash flow and high dividend yields, such as telecom companies, utilities companies and real estate investment trusts; last year, some of those companies, especially in the telecom area, underperformed significantly and saw valuations reach distressed levels. In our view these companies still face challenges, but they have been priced in.
Near-term market conditions could remain volatile, but from a dividend perspective the sustained earnings growth and improved cash flow profile of many firms in the region have provided a solid foundation for underlying dividends to help accelerate growth. So while we have recently become a more cautious, the outlook for Asia ex Japan still looks good and the macro conditions in the region have been maintaining a steady pace.
We still see a lot of opportunities in China, for example. Some of our positions saw strong share performance in 2017 and their current valuation multiples no longer offered risk/reward profiles that were as attractive as they were before. As a result, we decided to redeploy capital elsewhere. However, the portfolio still maintains an overweight and we have been adding to Chinese small- and mid-cap names that have reasonable valuations and attractive growth prospects.
Currently, the strong fundamentals and attractive valuations for companies in Asia are being overshadowed by market concerns over a potential trade war between the U.S. and China.
For investors who want to participate in Asia’s growth, dividend strategies could be a lower volatility way to do so. In our view, consistent payment of dividends helps to reduce some volatility in long-term returns, and is an effective gauge of a company’s overall strength, stability and quality of corporate governance.
To learn more about how we invest in Asia, visit global.matthewsasia.com/income
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 and emerging market securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The Fund invests in holdings denominated in foreign currencies, and is exposed to the risk that the value of the foreign currency will increase or decrease. The Fund invests primarily in equity securities, which may result in increased volatility. There is no guarantee that the Fund or the companies in its portfolio will pay or continue to pay dividends. These and other risks associated with investing in the Fund can be found in the Prospectus.
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 International Capital Management, LLC (“Matthews Asia”) and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information. Information contained herein is sourced from Matthews Asia unless otherwise stated. The views and information discussed herein 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.
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