Comment on Recent Market Volatility

In recent weeks, escalating concerns about the possibility of a U.S. recession and large losses by global banks have prompted a correction in stocks around the world. Most Asian markets have declined in sympathy, even as growth rates in many countries in the region appear high.

In some of our past commentaries, we have expressed concerns over valuations in parts of the region, noting that a significant pullback in those markets was a possibility. As a result, our portfolios have sought to avoid the most aggressive segments of the market, and have instead stayed fixed on our overriding goal, which is to invest in what we believe are the best long-term growth opportunities in Asia.

The markets' recent movements have led many commentators to discuss the notion of "decoupling"—the idea that fundamentals in Asia might be changing in a manner that could move independently from U.S. markets and elsewhere. For the most part, the opposite is true: economic growth in Asia has been spurred by their increasing integration and openness of the region with the rest of the world. As Asia's economies have grown more integrated, so too have its financial markets. This has for the most part been of great benefit to Asian equities—enhancing liquidity, transparency and growth. Yet it also means that it is unlikely that Asian markets can go unscathed when the rest of the world is experiencing a sharp decline.

The full impact of a U.S. recession on Asian markets is uncertain and we expect that global markets will continue to be volatile in the short term. However, as we often state, Asia's economic success is leading to the development of a middle class and an economic structure more capable of sustaining growth over the long term. Our portfolio managers continue to emphasize investments that are benefiting from this evolution.

The events of the past few weeks have not altered our conviction in Asia's long-term growth. At Matthews, we retain our core belief that the region will be the most important investment theme of the 21st century. It is often times like these—during periods of market volatility and uncertainty—that experienced investors find the most attractive investment opportunities.

Andrew T. Foster
Acting Chief Investment Officer
Matthews International Capital Management, LLC

January 22, 2008