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Mutual Fund Commentary

China’s economy gained traction in the first quarter of 2017, marking the second straight quarter of growth. An industrial sector recovery, strong credit growth, higher consumption’s contribution and a booming real estate sector helped the second largest economy of the world to register expansion last quarter.

Given such upbeat trends, the addition of mutual funds having significant exposure to Chinese securities could be a lucrative investment option. Now, we will take a quick look at some of the encouraging data that raised hopes of stable economic growth in China.

GDP Growth Best in Six Quarters

In the first quarter, China’s GDP rose 6.9% on an annualized basis, registering its best pace of growth in the last six quarters. The Chinese economy reported late growth, which is expected to continue even in the second quarter. Strong increase in government infrastructure spending and gains in the industrial sector benefited the overall economy. 

Spending by the central government as well as local governments advanced 21% year over year, which in turn helped boost the growth pace of the economy last quarter.  Further, China’s economy remained well above economists' projection of 6.8% year over year and the government's 2017 target of about 6.5%.

During the first quarter, industrial production increased 6.8% on the back of a 7.6% rise in March after advancing 6.3% in the first two months of this year. Overall, the industrial sector increased 6.5%, posting its fastest growth since the last quarter of 2014. In the industrial sector, the manufacturing sector expanded 7%.

Also, retail sales increased at an annual rate of 10.9% last month. Coming to the individual sectors, the retail and wholesale sector rose 7.4%, its fastest pace since the fourth quarter of 2014. It was also higher than the year-ago increase of 5.8%.

Consumption and Real Estate Investment Strengthens

Currently, the Chinese authorities are focusing on transforming an industrials-driven economy to a consumption-centric one. This was clearly reflected in an increase in consumer’s contribution to growth from last year’s level of 64.6% to 77.2%.

Additionally, fixed asset investment increased by 9.2% during the first quarter, significantly higher than 8.1% experienced last year. Meanwhile, real estate investment increased 9.1% during the same period. Further, the real estate sector in the sector table advanced 7.8%. The information technology and renting and leasing activities sector increased 19.1% and 10.2%, respectively.

Buy These 3 China Mutual Funds

The aforementioned positive data clearly indicate stabilization in the Chinese economy and raised hopes that it will continue to register strong growth even in this quarter. Moreover, the Shanghai Composite Stock Market Index gained 2.2% in last three months. Additionally, mutual funds related to China’s equity market also registered strong returns. According to Morningstar, the China region equity mutual fund posted 3-month and year-to-date (YTD) returns of 7.1% and 12.1%, respectively.

This upbeat backdrop calls for investors’ attention to three China mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have impressive year-to-date (YTD) returns. They also have minimum initial investment within $5000 and low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify 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.

Matthews China Dividend Investor (MCDFX - Free Report) seeks returns through income growth. MCDFX invests the majority of its assets in dividend-paying securities of those companies that are based in China. The fund not only invests in equity securities but also convertible debt instruments.

MCDFX has an annual expense ratio of 1.22%, lower than the category average of 1.78%. The fund has YTD returns of 9.7% and a Zacks Mutual Fund Rank #1.

Guinness Atkinson China & Hong Kong (ICHKX - Free Report) seeks growth of capital for the long run. ICHKX invests a bulk of its assets in equity securities of companies that are included either in China or Hong Kong exchanges or generate more than half of their revenues from China or Hong Kong.

ICHKX has an annual expense ratio of 1.66%, lower than the category average of 1.78%. The fund has YTD returns of 15% and has a Zacks Mutual Fund Rank #1.

Matthews China Investor (MCHFX - Free Report) invests the lion’s shares of its assets in preferred and common stocks of companies based in China and Hong Kong. MCHFX seeks appreciation of capital for the long run.

MCHFX has an annual expense ratio of 1.18%, lower than the category average of 1.78%. The fund has YTD returns of 16.9% and a Zacks Mutual Fund Rank #2.

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