- The exuberance of the pandemic rally favored companies that lacked profitability, cash flow or a pathway to it. Liquidity can keep things going but it doesn’t generate a self-sustaining business model.
- The war in Ukraine altered the dialogue around energy and indelibly changed the risk profile of companies whose states are known for pursuing kinetic action. These changes are likely to be long lasting.
- Interest rates don’t matter until they do. As rates rise, companies with high leverage have to roll over or replace existing debt with higher yielding instruments, challenging margins.
On April 30, 2020, we launched the Matthews Emerging Markets Equity Fund (MEGMX). The ensuing three years saw more changes in emerging markets than the whole of the previous decade. It tested our approach and our processes. I’d like to reflect on those changes and on the market environments that dominated, how our process guided us through and on the lessons we’ve learned.
Three distinct narratives unfolded that, in our view, impacted—and in some cases upended—many approaches to investing in emerging markets and equities generally. At the outset there was COVID-19, the first pandemic in 100 years; second was the war in Ukraine, the biggest ground conflict in Europe since World War II; and third was the rise in interest rates after almost two decades of close-to-zero borrowing costs. The types of companies that succeeded or collapsed during each of these narratives were very different.