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Unexpected summer blockbuster: Chinese stock funds

Published on NewsOK Modified: August 21, 2014 at 3:16 pm •  Published: August 21, 2014
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NEW YORK (AP) — Surprise: One of the summer's hottest investments was also one of the most anxiety-inducing a few months earlier.

Dollars are pouring into China again despite worries about the country's slowing economic growth. Chinese stock mutual funds have returned an average of 12.5 percent over the last three months, making them the second-best fund category of the 105 that Morningstar tracks.

Mutual fund managers say they still see opportunities in Chinese stocks, even though the recent gains mean they're no longer as cheap as they were. But investors hoping to take advantage should be mindful that Chinese stocks have a long history of jagged swings, one that has made even steadfast buy-and-hold investors nervous. China's economy also still has its doubters, as do broad swaths of its stock market.

"These are the times I love investing in a country, when the market is overly pessimistic," says James Oberweis, co-manager of the Oberweis China Opportunities fund (OBCHX), the top-performing Chinese stock fund over the last five years.

SLOWDOWN CONCERNS

Much of the worry centers on how well China can navigate a slowdown in its economic growth. Even through the global financial crisis, China's growth blew past the rest of the world. In the decade from 2002 through 2011, growth never dipped below 9 percent annually and got as high as 14.2 percent.

But this year, China's growth will slow to 7.4 percent, according to estimates from the International Monetary Fund. Next year, the IMF says the pace will fall to 7.1 percent. The Chinese government is in the midst of attempting to reshape the economy. It wants to focus more on consumer spending driven by its growing middle class than on trade and investment, hoping for a more sustainable rate of growth.

Many investors question how successful it will be revamping the world's second-largest economy. Those doubts come on top of longstanding concerns about the political risk of investing in China and the quality of accounting there.

Such concerns led to an essentially flat year for the MSCI China index in 2013. Many China-focused mutual funds use the index as a benchmark. The performance fell way short of the economies of developed markets. The Standard & Poor's 500 index shot up 29.6 percent in 2013.

CHEAPER PRICES

The struggles for Chinese stocks came even as profits for many of those companies continued to rise. That meant price-earnings ratios for Chinese stocks fell, and many investors use the ratio to measure how cheap a stock is. Chinese stocks traditionally carry lower price-earnings ratios than U.S. stocks, but the Chinese market also looks attractive relative to its own history, fund managers say.

"It definitely remains one of the world's cheapest markets," Oberweis says

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