China’s latest GDP data confirmed the slowdown in the economy, which was indicated by a flurry of weak economic data released over the past-one year period. Government data showed that the Chinese economy expanded at the slowest pace in the last 25 years in 2015. Concerns like decline in the Chinese currency yuan and sluggish manufacturing activity were mainly behind the decline.
A weak Chinese economic picture, which continued to raise concerns about the sluggish global growth condition, had not only affected stock markets worldwide, but also had a negative impact on mutual funds having significant exposure to the Chinese securities. The concerns also led to huge outflows from emerging market funds last year. According to research firm EPFR Global, around $69.2 billion and $32.6 billion of assets were pulled out from the emerging market equity and bond funds, respectively, in 2015.
Meanwhile, the International Monetary Fund (IMF) and World Bank reduced the outlook for global as well as Chinese economic growth this year. In this scenario, we have highlighted some major China mutual funds that have already suffered a lot and will continue to suffer in the coming months. Before going to the funds, let’s briefly discuss the slowdown of the Chinese economy and the key factors that affected the growth.
The Chinese economy grew at a pace of only 6.9% last year compared with 7.3% in 2014. The fourth-quarter growth rate of 6.8% came in lower than the third-quarter growth rate of 6.9%. China’s government said that the country’s economy is transitioning from one powered by manufacturing to one that’s heavy on services and consumption. This is evident from the share of contribution from each the sectors to last year’s GDP. While the share of services rose from 48.1% reported in 2014 to 50.5% last year, the manufacturing sector’s contribution declined from 42.5% to 40.5%.
The manufacturing growth rate came in at 6% in 2015, less than the 7.3% growth pace in 2014. In contrast, the services sector increased at a pace of 8.3% last year compared with 7.8% in 2014. Additionally, weak export numbers affected the growth environment last year. Reportedly, exports in 2015 declined 1.8% from the previous year to 14.14 trillion yuan. Contribution of exports to the Chinese economy gradually reduced from 34.9% in 2007 to 22.6% in 2014.
Separately, continuous rise in debt volume was one of the major headwinds last year. While profits in state-owned enterprises plunged 9.5% year on year for the January- November period, debt volume surged 18.2%, according to BMI Research Corp. Also, continuous devaluation in yuan and a weak economy led to flight of capital from the economy, which also emerged as one the main reasons behind the slowdown.
What Lies Ahead?
Though the slowdown in 2015 raised possibilities of the Chinese government and central bank opting for more aggressive economic stimulus measures to boost the economy, the outlook, at least for the near term, remains disappointing. Recently, IMF forecasted that the Chinese economy may expand at a slower pace of 6.3% this year and may grow even at a lower rate (6%) next year.
Moreover, the World Bank reduced its 2016 outlook for Chinese GDP growth by 30 percentage points to 6.7%, which lower than last year’s estimated growth rate of 6.9%. The bank also predicted that the economy may grow at a slower pace of 6.5% over the next two years.
Moreover, given the rising debt volume and the ongoing flight of capital, the People's Bank of China may find it difficult to cut interest rate further. Though the government is expected to increase the expenditure on infrastructure by a significant amount, it may fail to boost the economy in the near term.
3 Mutual Funds to Avoid
While a weak Chinese economy continued to dampen investor sentiment, let’s look at China exposed mutual funds that suffered significantly and may not perform well in the near team as well.
Below we present 3 China mutual funds that carry either a Zacks Mutual Fund Rank #5 (Strong Sell) or #4 (Sell). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify the potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
Oberweis China Opportunities (OBCHX - Free Report) invests the major portion of its assets in securities of Chinese companies with impressive growth prospects for the long term. OBCHX primarily focuses on acquiring common stocks of companies. OBCHX can also invest in equity-linked certificates.
OBCHX currently carries a Zacks Mutual Fund Rank #5 (Strong Sell). Over the past 3 months, OBCHX lost 9.6% while it is down 12.8% so far this year. OBCHX has an annual expense ratio of 1.93% as compared to the category average of 1.76%.
Templeton China World A (TCWAX - Free Report) seeks growth of capital over the long run. TCWAX invests majority of assets in securities of companies located in China irrespective of market capitalizations. TCWAX may invest a maximum of 20% of its assets in securities of companies that are believed to get benefited from economic development of China, Hong Kong or Taiwan. This non-diversified may also invest in American, Global and European Depositary Receipts.
TCWAX currently carries a Zacks Mutual Fund Rank #5. Over the past 3 months, TCWAX lost 15.1% while it is down 11.9% so far this year. TCWAX has an annual expense ratio of 1.84% as compared to the category average of 1.76%.
Guinness Atkinson China & Hong Kong (ICHKX - Free Report) invests the lion’s share of its assets in equity securities of companies either traded in China or Hong Kong or are expected earn more than half of their revenues from the region. ICHKX invests a minimum of 65% of its assets in securities of companies listed in the Hang Seng Composite Index. ICHKX is a non-diversified fund.
ICHKX currently carries a Zacks Mutual Fund Rank #4 (Sell). Over the past 3 months, ICHKX lost 17.1% while it is down 14.3% so far this year. ICHKX also plunged 21.8% over the past one-year period.
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