Market Environment

• Emerging markets performed better than expected in the first quarter of 2025 thanks in part to a more favorable macro environment. Many investors had expected the strength in the dollar and U.S. equity market to continue into 2025 and contribute to a weaker performance in the asset class but that didn’t happen.
• At the country level, performance was mixed. China, Brazil and Mexico led the markets higher while Taiwan and India faced pressure. China technology shares were buoyed by the success of the DeepSeek artificial intelligence (AI) platform which in turn spurred a selloff in U.S. big tech stocks and negatively impacted Taiwan, a market that is almost a direct play in a narrow area of technology driven by AI.
• India’s market was challenged as earnings disappointed amid softening economic growth caused by weaker government spending and tight monetary policy. In more peripheral markets, Southeast Asia should have benefited from a weakening U.S. dollar but was hurt by political disruption while Latin America delivered robust returns supported by the macro environment.
• As the quarter progressed, optimism toward emerging markets as whole receded as U.S. economic data deteriorated and concerns gathered over the prospect of new far-ranging reciprocal U.S. tariffs and a trade-related global economic slowdown.

Contributors and Detractors

• For the quarter ended March 31, 2025, the Matthews Emerging Markets Equity Fund returned 1.69%, (Investor Class) and 1.69% (Institutional Class) while its benchmark, the MSCI Emerging Markets Index, returned 3.01% over the same period.
• On a country basis, the top three contributors to relative performance were Taiwan due to an overweight allocation, South Korea due to stock selection and Malaysia due to zero allocation. The top three detractors were India due to an underweight allocation and stock selection, and United Arab Emirates and Brazil due to stock selection.
• On a sector basis, the top two contributors to relative performance were real estate due to stock selection and industrials due to an underweight allocation and stock selection. The top three detractors were materials due to an underweight allocation, information technology (IT) due to stock selection and communication services due to an overweight allocation and stock selection.
• The largest contributors to absolute performance included Alibaba Group, the largest e-commerce platform company in China, Tencent Holdings, a Chinese online gaming and social media conglomerate, and SK Hynix, a South Korean supplier of dynamic random-access memory (DRAM) chips. The top three detractors included Taiwan Semiconductor Manufacturing Co. (TSMC), a globally leading chipmaker, Infosys, a leading Indian consulting company, and Mahindra & Mahindra, an Indian auto and farm equipment manufacturer.

Outlook

• Front and center to our outlook is the impact of U.S. tariffs on the global economy and markets. The Trump administration’s tariff policy has shown itself to be fluid and unpredictable. We may see some new tariffs rolled back in certain markets and a different picture coming into focus in the coming weeks and months.
• At this point, what we can conclude is that from a U.S. perspective, the administration’s tariff policy is growth negative and inflation positive. It probably means that inflation stays around 3% and that has implications for the Federal Reserve’s interest rate policy and in turn for emerging markets.
• When the global economy is under pressure, we believe domestic drivers are more important than global drivers. For Asia, that means we need to be cautious of markets that are correlated to the U.S. and of companies that are selling into the US. Domestic demand-driven markets like India and China, which rely less on the global economy, we think will be more resilient.
• We believe emerging markets will be supported by a pick-up in earnings on valuations that are still cheap. Thus, we think there are opportunities for experienced active managers to pick their spots and focus on fundamentals.

Top 10 holdings as of March 31, 2025. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MEGMX as of 03/31/2025