HSBC China Manufacturing PMI Hits 18-Mth High: 3 Fund Picks

Gourab Das

After a tough ride last year, China seems to be on the growth trajectory now. The Purchasing Managers' Index (PMI.V) surged to multi-months high in July, as suggested by both the China government and HSBC/Markit. Both reported the manufacturing PMI has jumped to 51.7 in July. China’s manufacturing expanded at the fastest rate in over two years.

The Chinese government has implemented several stimulus measures to ensure that growth remains on track. The measures seem to be actually benefiting the economy now.

Separately, other developments in the nation are mostly on the positive side. There are also possibilities of the mutual recognition between mainland China and Hong Kong being extended. (Read: Will China's Mutual Recognition Expand? 3 China Funds to Buy)

For investors, it may be a wise step to invest in certain China mutual funds. We will pick the top-ranked China funds which should be safe investments now. However before doing so, let’s dig a little deeper into the recent events in China and the PMI data.

Manufacturing Activity at Multi-Months High

The National Bureau of Statistics and China Federation of Logistics and Purchasing reported the manufacturing PMI to have increased to 51.7 in July. The official PMI hit a 27-month high and outpaced estimates of 51.4.

HSBC/Markit also reported its manufacturing PMI to have increased to 51.7, the best level in 18 months.

The official PMI reported new orders were up from June's 52.8 to 53.6 in July. New orders reached the highest level since May 2012. According to HSBC/Markit, the new orders index rose to 53.3, its best reading since Mar 2013.

However, the National Bureau of Statistics and Federation of Logistics and Purchasing reported its non-manufacturing purchasing manager’s index (PMI.V) dipped to 54.2 in July from June's 55.

Stimulus Measures Take Effect

The Chinese government has implemented several stimulus measures to ensure that growth remains on track. This includes both monetary and fiscal measures, namely easing credit and increasing government spending. However, it also includes significant regulatory reforms.

This includes changes to house purchase regulations to rejuvenate a beleaguered property sector. Such steps have possibly been triggered by a decline in home prices. However, the good news is that they have been greeted with resounding applause by the markets.

Shanghai Composite Index Hits 7-Mth High

The Shanghai Composite Index gained 2.4% to touch a seven-month high last Monday. The benchmark index closed in the green for a fifth successive session following indications of an economic recovery. Gains were also fuelled by expectations that the government will increase the pace of banking sector reforms. The benchmark index gained for the sixth successive day on Tuesday as technology companies led the gains for stocks. This is its longest series of gains in nearly a year. Markets have regained their confidence in the economy as fundamentals continue to improve.

China Funds to Buy Now

PMI numbers indicate that the economy is on track to achieve its 7.5% growth target for 2014. The economy grew at 7.5% in the second quarter on a year-over-year basis.

Below we will share with you 3 favorably-ranked China funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its 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 the likely future success of the fund.

Direxion Monthly China Bull 2X Fund Investor (DXHLX) seeks to provide 200% return (before fees and expenses) of the monthly performance of the FTSE China 25 Index. The fund invests most of its assets in securities listed in the index. It may also buy financial instruments that offer a leveraged exposure to this index. The fund may hold money market funds or debt instruments carrying a maturity of less than 397 days. These may include U.S. government securities.

The fund currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). The fund has returned 39.5% over the last one-year period. The fund’s annual expense ratio of 1.90% is lower compared to category average of 2.03%.

Guinness Atkinson China & Hong Kong (ICHKX) seeks capital appreciation over the long term. It invests in companies traded on the Hong Kong and Chinese exchanges. It also purchases securities of companies who derive at least half of their revenues from operations in China. The fund invests a minimum of 65% of its assets in firms that are listed in Hang Seng Composite Index. The fund invests in companies of any market capitalization and may also invest in emerging markets.

The fund currently carries a Zacks Mutual Fund Rank #2 (Buy). The fund has returned 19.1% over the last one-year period. The fund’s annual expense ratio of 1.52% is lower compared to category average of 1.78%.

Fidelity Advisor China Region A (FHKAX) seeks long-term capital appreciation. The fund invests a lion’s share in companies based in Hong Kong, Taiwan, and China, and also in companies economically connected to China. The fund invests a maximum of 35% of its assets in industries that account for over 20% of the Hong Kong, Taiwanese and Chinese market.
 
The fund currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). The fund has returned 21.9% over the last one-year period. The fund’s annual expense ratio of 1.31% is lower compared to category average of 1.78%.

To view the Zacks Rank and past performance of all China mutual funds, investors can click here to see the complete list of funds.

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By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.


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