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China Cheers Economic Bright Spots And Stimulus Hopes: 3 Funds To Buy

China’s benchmark Shanghai Composite Index hit the best levels since May 2008 recently, on expectations of more stimulus measures. The Shanghai Composite Index gained a significant 7.3% last week. It is not only the U.S. Federal Reserve’s pledge to go slow with hiking rates that drove markets, but the second-largest economy’s bright spots are also worth the cheer. Key economies including the U.S., Europe, Japan have maintained loose monetary policies. This has helped global equities. China’s markets too have been gaining recently on promises to implement necessary stimulus measures in case growth was significantly affected. Meanwhile, IMF Managing Director Christine Lagarde acknowledged that the fate of Chinese economy and the global economy are related. China is making efforts to transform into a self-sustaining economy banking on domestic consumption. Employment and services have been attributed to be the bright spots, and the slowdown is stabilizing according to Vice Premier Zhang Gaoli. This comes after Premier Li Keqiang reassured that his government would take further steps to manage the economic situation. Thus, China promises to be a growth opportunity now for mutual fund investors. China had braved loads of dismal economic data last year to clock significant gains for the benchmarks. The markets’ rally has continued this year, handing yet another profit opportunity for mutual fund investors. Bright Spots for Economy China’s political leadership had previously expressed satisfaction with a lower level of growth. The country seeks a path of slower but sustainable prosperity even as it transitions from an export-led manufacturing economy to one which depends more on services and domestic demand. Vice Premier Zhang Gaoli acknowledged that the downward pressure has increased since the start of 2015. He also said that it is “impossible and unnecessary to maintain the high-speed growth seen in the past.” China’s economic growth is forecasted to cool down to 7% in 2015 from 7.4% in 2014. This would be a multi-year low. Nonetheless, Zhang Gaoli pointed out employment, services, high-tech industries, new industries, private investment and innovations to be the bright spots. The slowdown was also said to be slowing down now. The slowdown is seen as “new normal” and a “higher quality” of expansion by President Xi Jinping and others. Lagarde said: “Now indeed, China navigates this new normal of its own economy; it contributes more to the global common good and to economic and financial stability as well”. Zhang Gaoli reaffirmed that China would keep the monetary policy “not too tight and not too loose”. The country will focus on targeted adjustments. Monetary Stimulus Assurances Premier Li provided reassurances that his government would take further steps to manage the economic situation. This included steps to boost growth, combat deflation as well as deal with other important economic issues. Speaking about the economy, he said that the government was attempting to take a middle path, striving to boost growth and simultaneously implementing major structural reforms. Premier Li added that the country will successfully leverage the lower cost of borrowing to ease China’s transformation from an economy driven by exports to one powered by higher consumer demand. The focus will then shift to consumers and the services sector. Previous Stimulus Measures In Nov 2014, the People’s Bank of China (PBOC) announced its surprise decision to reduce interest rates. This was the first reduction in rates undertaken in more than two years. Market watchers were taken by surprise because since that time, the PBOC had stuck to more moderate stimulus measures. This was followed by further monetary easing in February. The People’s Bank of China announced that it was reducing the reserve ratio by 50 basis points. Analysts said that the central bank’s move followed a series of weak economic reports. This indicated that other measures might be needed to be taken by the government to boost the economy. 3 Funds to Buy Here we will list 3 top China mutual funds that carry 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. These funds also have encouraging 1 year and 3-year annualized returns. The expense ratio for each of these funds is lower than their category averages. Fidelity Advisor China Region Fund A (MUTF: FHKAX ) seeks capital appreciation over the long run. The fund invests a lion’s share in companies based in Greater China. The fund invests a maximum of 35% of its assets in industries that account for over 20% of the Hong Kong, Taiwanese and the Chinese market. Factors such as financial strength and economic condition are considered to invest in common stocks of companies. FHKAX carries a Zacks Mutual Fund Rank #1 (Strong Buy). The fund has returned 14.8% in the last one year and the three-year annualized return stands at 13.7%. It carries an annual expense ratio of 1.35% as compared to category average of 1.78%. However, the fund has a front end sales load of 5.75% as compared to category average of 5.33%. It carries no deferred sales load. AllianzGI China Equity Fund A (MUTF: ALQAX ) invests most of its assets in equities of Chinese companies. These Chinese firms may be incorporated in China, or earn at least half of their revenues/profits from businesses in mainland China, or own half of their assets in the region. ALQAX carries a Zacks Mutual Fund Rank #2 (Buy). The fund has returned 17.6% in the last one year and the three-year annualized return stands at 7.7%. It carries an annual expense ratio of 1.70% as compared to category average of 1.78%. However, the fund has a front end sales load of 5.5% as compared to category average of 5.33%. It carries no deferred sales load. Matthews China Fund Investor (MUTF: MCHFX ) invests a majority of its assets in common and preferred stocks of companies located in China. This includes companies based out of Hong Kong and other Chinese administered regions. It seeks long term capital growth. MCHFX carries a Zacks Mutual Fund Rank #2 (Buy). The fund has returned 10.3% in the last one year and the three-year annualized return stands at 2.4%. It carries an annual expense ratio of 1.11% as compared to category average of 1.78%. The fund has no front end or deferred sales load.

Can Energy ETFs Regain Fervor On Capital Spending Cuts?

After a seven-month wild run, oil and energy stocks have bounced back strongly in recent sessions following the slew of capital spending cuts by several major players in the industry. This move, along with the latest data that a number of U.S. oil drilling rigs fell the most in 30 years last week, propelled the oil prices higher. In fact, both the crude and Brent surged about 20% in the four days till Tuesday, marking the longest winning streak since January 2009. However, oil price again reversed its four-session rally, dropping 8.7% yesterday after U.S. crude inventories jumped to a record high last week. Notably, crude is currently hovering around $50 per barrel while Brent is trading at over $55 per barrel. Spending Cuts at a Glance A large number of firms whether domestic or international have slashed their capital spending for this year in order to conserve cash balance for dividend payments. The second largest U.S. oil giant Chevron (NYSE: CVX ) trimmed its capital spending by 13% to $35 billion for this year while ConocoPhillips (NYSE: COP ) cut its spending by an additional 15% after reducing it 20% in December. Occidental Petroleum (NYSE: OXY ) reduced its capital spending by 33% to $5.8 billion for this year. European oil majors also followed suit. BP plc (NYSE: BP ) announced spending cuts by 20% to $20 billion for this year from the previous guidance of $25 billion. Royal Dutch Shell (NYSE: RDS.A ) plans to cut capital spending by $15 billion over the next three years while Total SA (NYSE: TOT ) trimmed its capital expenditure by 10% for this year. Further, the Chinese oil major CNOOC (NYSE: CEO ) slashed its capital spending by as much as 35% for this year and Russian oil major Gazprom ( OTCQX:GZPFY ) reduced it by $8 billion. Brazilian state-run energy giant Petroleo Brasileiro S.A. (NYSE: PBR ) or Petrobras also lowered its capital expenditure budget to $31-$33 billion from $44 billion. The efforts taken by these oil giants will likely curb oil production and reduce global supply, and thereby lead to higher oil prices. Market Impact Driven by a slew of investment cut plans, energy stocks and ETFs have made an impressive comeback and are easily crushing the overall market by wide margins over the past five days. In particular, SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) , First Trust ISE-Revere Natural Gas Index Fund (NYSEARCA: FCG ) and PowerShares S&P SmallCap Energy Fund (NASDAQ: PSCE ) gained the most surging in double digits in the same period. Below we profile these ETFs in detail and discuss some of the specifics behind their recent rally: XOP This fund provides equal weight exposure to 83 firms by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. Each holding makes up for less than 2.2% of the total assets. XOP is one of the largest and popular funds in the energy space with AUM of $1.9 billion and expense ratio of 0.35%. It trades in heavy volume of more than 10.4 million shares a day on average. FCG This fund offers exposure to the U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows the ISE-REVERE Natural Gas Index and holds 28 stocks in its basket that are well spread out across each component with none holding more than 6.05% of the assets. The fund has amassed $272.7 million in its asset base while charging 60 bps in annual fees. Volume is good with more than 942,000 shares exchanged per day on average. PSCE This fund provides exposure to the energy sector of the U.S. small cap segment by tracking the S&P Small Cap 600 Capped Energy Index. Holding 35 securities in its basket, it is concentrated on the top five firms that make up for 37.9% share. Other firms hold less than 5.4% of total assets. The fund is less popular and less liquid with AUM of $28.6 million and average daily volume of about 24,000 shares. Expense ratio came in at 0.29%. Other energy ETFs were also in deep green over the past five trading sessions. Some of these include IQ Global Oil Small Cap ETF (NYSEARCA: IOIL ) , First Trust Energy AlphaDEX (NYSEARCA: FXN ) , Market Vectors Unconventional Oil & Gas ETF (NYSEARCA: FRAK ) and PowerShares Dynamic Energy Exploration & Production ETF (NYSEARCA: PXE ) . All these are up in upper single digits. What’s In Store? The rally in the energy ETFs seems to be short lived as reduced investments will likely cut supply in the long term and short-term supply with remain intact. As per the latest EIA report, the U.S. crude stockpiles rose 6.3 million barrels in the week (ended January 30), much higher than the market expectation of a 3.7 million barrel increase. Total inventory came to 413.1 million barrels, representing the highest level in at least 80 years. The current threat facing the U.S. oil industry is the strike in the U.S. at nine refineries by the United Steelworkers union. This is the biggest strike since 1980 and will likely curtail crude processing adding to the supply glut. It could affect 10% of the U.S. refining capacity and if the strike turns to be a full-blown crisis, it could threaten about two-thirds of the total refining capacity, indicating more pain for the commodity and the energy stocks.