INDUSTRY VOICE: When President Donald Trump was elected in November 2016, investors wondered about the possible impact of U.S. protectionism on Asia and in particular China. Yet in the absence of substance behind the political rhetoric, investors in China enjoyed robust performance in 2017.
The news turned negative last month, however, and Asian markets fell sharply following President Trump's plans to introduce tariffs on up to US$60 billion in Chinese imports. The MSCI Asia Pacific Index fell -2.12% in U.S. dollar terms in March, while the MSCI China Index was down -3.29%.
In volatile times, investors may think small cap stocks are most at risk. In China, however, it is a different story. Talk of a trade war pressured China's larger companies and the U.S. market more than it did Chinese small caps.
There are fundamental and technical reasons for the differing impact.
Fundamentally, our research shows that small caps are inherently companies that rely on self-generated capital. This means they are largely self-sustaining. By not being so dependent on financing, in volatile times—with interest rates rising and a focus on deleveraging—their costs are not impacted as much as they are for large-cap companies.
From a technical standpoint, Chinese small caps have long been overlooked by investors. This underinvestment means their liquidity profile is thinner compared with, for example, U.S. small caps. A knee-jerk reaction to events by small-cap market participants will cause stock prices to react, but it is unlikely to trigger a major sell-off.
This is because by being an underinvested asset class, there are not many exchange-traded fund (ETF) options for Chinese small caps. In the absence of programmed trading, the initial volatility to global events, such as the headlines regarding Trump's tariffs, usually abates after a day or two. For other global asset classes, a downturn typically lasts much longer.
At the same time, because our focus is on companies that are globally innovative, services-driven and have sustainable pricing power, many proposed protectionist measures will likely not apply. These are companies that are innovating on their home turf and are delivering both products and services to their local middle class.
This is important because what may next spark volatility is unknown. It could be a rise in interest rates or a global slowdown. Many factors can impact a company's costs or pricing. We believe the way to minimize this uncertainty is to pick shares of companies that have strong pricing power with goods that are seen as a necessity, which people are willing to pay for even if they need to sacrifice elsewhere. As a consequence, we have not made substantial changes to our investment philosophy in relation to the Chinese small caps.
To learn more about our views on investing in China, visit global.matthewsasia.com
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 currency, 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. Investments in a single-country fund may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. The Fund invests in smaller companies, which are more volatile and less liquid than larger companies. These and other risks associated with investing in the Fund can be found in the Prospectus.
For Institutional/Professional Investors Only.
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.
Investment involves risk. Investing in international and emerging markets may be subject to risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. This document is not a Prospectus/Offering Document and does not constitute an offer to the public. No public offering or advertising of investment services or securities is intended to have taken effect through the provision of these materials. This is not intended for distribution or use in any jurisdiction in which such distribution, publication, issue or use is not lawful. An investment in Matthews Asia Funds may be subject to risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The current prospectus, Key Investor Information Document or other offering documents ("Offering Documents") contain this and other information and can be obtained by visiting matthewsasia.com. Please read the Offering Documents carefully before investing as they explain the risks associated with investing in international and emerging markets.
In the UK, this document is only made available to professional clients and eligible counterparties as defined by the Financial Conduct Authority ("FCA"). Under no circumstances should this document be forwarded to anyone in the UK who is not a professional client or eligible counterparty as defined by the FCA. Issued in the UK by Matthews Global Investors (UK) Limited ("Matthews Asia (UK)"), which is authorised and regulated by the FCA, FRN 667893.