James Gard: Welcome to Morningstar. With me today is Andrew Mattock. He is Portfolio Manager for the Matthews Asia, China and China Small Companies Fund.
So, Andrew, can you tell us a little bit about the fund's investment philosophy please?
Andrew Mattock: Yes, sure. So, we're growth at a reasonable price across the board. We'll invest in any part of the Chinese stock market, so that includes Shanghai, Shenzhen, which is dominated by the Chinese themselves, and then overseas listed Chinese stocks, which obviously tend to get affected by foreign sentiment both in Hong Kong and the U.S. listed ADRs. We try to keep the stock list as tight as possible. Yes.
Gard: So, these are very difficult times for investors in China. What's your long-term conviction for investing in the country?
Mattock: I think there's two parts to it. I think what's going on in the local market is very much around what Chinese people think about themselves, Shanghai, Shenzhen local market retail investors. Zero COVID when we came out of lockdown. The sell-off has been largely driven by that year-to-date. On the other side of things, it's really more about regulation, the Chinese government issues regarding maybe the perceived heavy handedness when it comes to the regulation side. So, look, clearance on those two different things for two different reasons will provide some positive momentum for the market.
Gard: So, you're saying it's kind of a temporary setback for the case for China?
Mattock: Yeah, I think on the local side, obviously, the zero COVID Shanghai lockdown really has had an impact, not just in Shanghai but broader China with supply chain even with domestically. So, I keep reminding people that it's not 2012 though in China. We're not facing all the issues, massive amount of corruption, anti-corruption drive and overinvestment out of financial crisis. (Indiscernible) spent too much if you want to put a lot of banks that had all of bad debt. The local government financial vehicle debt that was out of control. So, structurally, China 10 years later is a lot better than that situation. Just zero COVID. On the foreign side, the regulation, I think this whole idea of making these platform companies' behavior a little bit better. I think we're getting to the end of that as well. So, clearance there I think will be a positive thing for foreign sentiment.
Gard: Thanks very much. So, you also manage the Small Companies Fund for Matthews Asia. Is there a particular appeal that small companies have in China? Investors generally think about the mega caps, but the smaller companies have a different sort of dynamic.
Mattock: So, I think, China is what it is – center of manufacturing the world. So, what do you get in that smaller – small and mid-cap space, 1 billion to 5 billion market cap if you want to put it like that, is the whole supply chain and it's all listed in the Chinese stock market, in particular mainland market, Shanghai, Shenzhen. So, when you rip apart smartphone, the wind turbine, the solar panel, the battery car, the battery itself, it just goes on and on, the fridge, the air conditioner, you get a lot of the supply chain in China, and a lot of that exposure is in those smaller companies. Now, that's the upside. There's a lot of really, really exciting growth areas coming China's way, but the competition is rampant. You always have to look over your shoulders. So, it's not all positive.
Gard: Sure. Thanks. So, you mentioned some sectors there. Are there any sectors you're particularly keen on at the moment?
Mattock: Yeah, I mean, there is. I think when you look at the energy side, China is dependent on oil and gas. So, geopolitically, economically, renewable energy, solar wind, the grid that goes with it, high voltage power lines are so important. Then an extension of that is battery cars, the batteries themselves. Right now, China's hourly volume, economies of scale, one thing it beats the rest of the world in, has a good leg in that part of it. Automation – wage costs are going up in China. Automation is increasingly becoming important to replace labor in some of these manufacturing industries. And the last part maybe I would highlight is maybe IT hardware and software. As a result of the geopolitical issues between the U.S. and China, securing your hardware, securing your software, developing software outside of Western software is increasingly becoming self-sufficiency, geopolitically it's becoming very, very important. So, there are five areas. Maybe capital market reform, what's going on in the capital markets, deepening mutual fund industry creation, increased participation by locals. That's just maybe another area. But there's a lot going on.
Gard: Sure. Fair enough. So, thanks very much for your insights there into the Chinese market. For Morningstar, I've been James Gard.
