China’s industrial profits fall
According to the National Bureau of Statistics of China (or NBS), China’s industrial profits fell sharply by 4.6% in October from a year earlier after dipping 0.1% in September. The sharp decline in October profits was mainly due to low sales, rising labor cost, and low commodity prices. Industrial profits in October were less affected by currency fluctuations and lower income on investments.
From January to October, industrial profits fell 2.0% year-over-year while profits fell 1.7% from January to September, during first nine months of 2015.
Chinese firms continue to struggle with high debt levels—particularly in heavy industry and inefficient state-owned enterprises—with producer price deflation effectively raising their real debt repayment burden.
Impact on mutual funds
For the AllianzGI China Equity Fund – Class A (ALQAX), industrials are the second-largest portfolio holding, with a 19.9% weight as of September 30, 2015. Meanwhile, for the same period, the Guinness Atkinson China & Hong Kong Fund (ICHKX) and the Eaton Vance Greater China Growth Fund (EVCGX) have more than 10% exposure each to the industrials sector.
A decline in industrial profits will downwardly affect the performance of the above-mentioned China-focused mutual funds, as they heavily invest in the industrials sector.
The above mutual funds invest in stocks such as Taiwan Semiconductor Manufacturing Company (TSM), CNOOC (CEO), Tencent Holdings (TCEHY), and China Mobile (CHL). These companies’ profits are falling due to sluggish demand globally, so mutual fund performance will also be adversely affected.