China’s real GDP contracted a staggering 6.8% in the first quarter, but Andrew Mattock, portfolio manager of the Matthews China Fund, is optimistic about a swift recovery of the nation.
Expert Investor talked to Mattock about how he has protected his fund in the market turmoil and other insights he has learned from the crisis so far.
Sector slump
Financials, which make up 24.6% in the fund, were a detractor in its performance, says Mattock.
Five financial companies rank among the fund’s top 10 holdings, including China Construction Bank, China Merchants Bank and Ping An Insurance Group.
Shares by China Construction Bank plunged 12% to HK$6.02 from HK$6.83 (€0.81) between 1 January to 23 April.
Adding high-quality names
The crisis has opened up new buying opportunities in terms of high-quality names.
The fund is already overweight in the consumer discretionary sector (25.5%), including known brands, such as e-commerce giants Alibaba Group and JD.com.
But, over the years, China has developed greatly in many economic sectors, Mattock says.
The stocks that he can buy are very different from what was available during the global financial crisis, which has allowed him to respond to the coronavirus pandemic differently.
“To tell the truth, the number of choices that we had 10 years ago in these areas just weren’t there. Online shopping didn’t exist. And online goods and services […] all these companies just didn’t exist,” he says.
“So, we have that opportunity this time around to add into those types of areas,” Mattock says, plus companies that were structural growth drivers anyway.
He bought positions in some sectors which outperformed disproportionally due to the crisis.
These are in the healthcare, consumer staples and the communication service sector, which includes online purchase services.
“What we haven’t seen is mass liquidation in the small-mid cap area,” Mattock says.
But he is wary that small caps could be hit in the next phase of the correction.
Meanwhile, he believes that the disruption could play out well for better run companies and strengthen their positions.
“The fund’s holdings tend to have strong cash flows and strong competitive moats. This may enable these companies to weather a more prolonged recovery phase and at the same time consolidate the market as smaller and less efficiently run businesses fall behind,” he notes.
Self-sufficiency
What stood out for Mattock was the disciplined culture and collective responsibility that China’s people have shown in the crisis.
Mattock says that, given its dealing with the outbreak and its economic independence, the country’s recovery will be fast.
“In China, everyone took it seriously, and everyone got on with it. And, as a result of that, you can get the virus under control quite quickly.
“I think this one [crisis] is maybe more severe, in terms of immediate economic loss, but I can see the recovery could be also a lot quicker,” he explains.
