3 Mutual Fund Picks For A Stable Chinese Economy

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Includes: ALQAX, AMCYX, FHKAX, FHKIX, ICHKX, MCDFX, MCHFX, OBCHX
by: Zacks Funds

China's economy had hit a rough patch during the beginning of the year. However, it seems its economic transition is underway, thanks to upbeat second-quarter GDP data. Even though private investments shrank, the surge in new loans indicates banks are pumping in money to prop up growth.

Retail sales of consumer goods also climbed in June, revealing an encouraging trend. In the face of severe adversities, the country is shifting from an export-driven economy to a consumer-oriented one. Moreover, industrial production was promising in June, bolstering the view that the economy is firming up. If that be so, it will be prudent to invest in China-focused mutual funds that have solid fundamentals, provide consistent returns, and are less expensive.

GDP Beats Expectations

China's economy expanded in the second quarter of 2016 at an annualized pace of 6.7%, more than analysts' expectation of a 6.6% rise, according to the National Bureau of Statistics. Stimulus measures by both the government and the People's Bank of China (PBOC) helped the economy to register better-than-expected growth. Investment in infrastructure and a rebound in the real estate industry contributed immensely to growth.

But, sluggish exports shrank private investment growth, which accounts for a large portion of China's total investments. The global slowdown in demand impacts the performance of funds such as Fidelity Advisor China Region Fund Class A (MUTF:FHKAX), as it invests a major portion of its assets in companies such as Alibaba Group Holding Ltd (NYSE:BABA). Hence, it is imperative for the government to continue with its monetary support programs to sustain the economy.

New Loans Rise

Banks have, however, stepped up efforts to boost Chinese economic growth. According to the PBOC, new loans issued by banks rose to $206 billion in June from $150 billion in May. Broad money supply also remained unchanged in June from May, increasing by 11.8% on a year-over-year (YoY) basis.

China's aggregate financing, the broadest measure of credit growth in the economy, also went up to $244 billion in June from $115.2 billion in May. Increase in the amount of money flowing into the economy should entice investors to buy Chinese shares through funds such as AllianzGI China Equity Fund Class A (MUTF:ALQAX). And why not? Positive retail sales numbers and industrial production in June too confirmed strong second-quarter growth.

Consumer Spending Recovering

According to the National Bureau of Statistics, China's retail sales soared by 10.6% in June on a YoY basis, higher than May's growth of 10%. The reading was also the highest since December last year. In urban areas, retail sales grew by 10.5% YoY, while in rural areas sales were up 11.2% YoY.

Retail sales, in the first six months of the year, were up 10.3% YoY, led by higher wages and lower prices. The e-commerce segment was the biggest factor in driving up retail sales during this period. Thanks to online sales, funds like Guinness Atkinson China And Hong Kong Fund (MUTF:ICHKX) are expected to show signs of improvement given their exposure to the consumer discretionary sector. The increase in retail sales discloses a marked rise in household spending levels.

Industrial Output Strengthens

In June, China's industrial output jumped 6.2% year over year, up from 6% growth recorded in the previous month. The increase in industrial output exceeded a median forecast of 5.9% growth by 16 economists in a survey by The Wall Street Journal. On a month-on-month basis, industrial output increased 0.47% in June from May.

Increase in government spending on infrastructure projects drove industrial production. This rise in factory output is encouraging news for funds such as Oberweis China Opportunities Fund (MUTF:OBCHX) and Matthews China Fund Investor Class (MUTF:MCHFX) to name a few, as they have a sizeable portion exposed to the industrial sector.

3 China Focused Mutual Funds to Buy Now

China's Q2 GDP data came ahead of expectations indicating that the economic slowdown has somewhat abated. Capital Economics' China Activity Proxy, which also monitors China's economic activity, showed that its economy expanded 4.5% in the second quarter. The country's retail sales too showed strong recovery in June, a telltale sign that consumer spending is improving, while industrial production strengthened.

Given this positive scenario, investing in mutual funds having a considerable exposure to the Chinese economy will be a judicious decision. We have chosen three such mutual funds that possess a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, minimum initial investments within $5000 and carry neither front or deferred load.

Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify their portfolio without the numerous commission charges that stocks need to bear.

Matthews China Dividend Fund Investor Class (MUTF:MCDFX) seeks to achieve its investment objective by investing a major portion of its assets in dividend-paying equity securities of companies located in China. MCDFX's 3-year and 5-year annualized returns are 8.6% and 7.2%, respectively. MCDFX carries a Zacks Mutual Fund Rank #1.

Fidelity Advisor China Region Fund I Class (MUTF:FHKIX) invests a large portion of its assets in securities of Hong Kong, Taiwanese, and Chinese issuers and other investments that are tied economically to the China region. FHKIX's 3-year and 5-year annualized returns are 5.1% and 3.1%, respectively. FHKIX carries a Zacks Mutual Fund Rank #2.

Invesco Greater China Fund Class Y (MUTF:AMCYX) invests the majority of its assets in equity or equity-related instruments issued by companies located or operating in Greater China. AMCYX's 3-year and 5-year annualized returns are 8.4% and 1.2%, respectively. AMCYX carries a Zacks Mutual Fund Rank #1.

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