Between escalating tensions with North Korea and a U.S. Congress in gridlock, it can sometimes be challenging to stay positive. That’s why I’m pleased to share with you this good news: Our China Region Fund (USCOX) was up more than 45 percent for the 12-month period as of September 22, 2017, beating its benchmark, the Hang Seng Composite Index (HSCI), which gained 20.7 percent over the same period. This means USCOX outperformed the index by roughly 25 percent.
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Put another way, USCOX has beaten the HSCI in eight of the past 11 months, or 73 percent of the time, with the greatest monthly spread between fund and index occurring in June.
One of the main contributors to our outperformance is our overweight positions in information technology and consumer discretionary stocks, which made up a combined 61 percent of the fund as of September 22. As we see it, these sectors are where the growth is, driven by innovative tech firms, from Sunny Optical to Tencent, and automakers such as Geely Automative, Guangzhou Automotive and Great Wall Motor.
Asian Stocks Look Cheap Compared to the American and European Markets
When measured against the American and European markets, Asian stocks, excluding Japan, have been the top performers of 2017 so far, returning more than 30 percent year-to-date. That’s compared to an 11.7 percent gain for the S&P 500 Index and 20 percent gain for the STOXX Europe 600.
Asian stocks also have a more attractive valuation than these other two regions. With the S&P 500 trading at 21.4 times earnings and the STOXX Europe 600 trading at 21.2 times earnings, the MSCI Asia Pacific ex-Japan Index looks more reasonable at 15.6 times earnings.
The China Region Fund, meanwhile, trades at 15.5 times earnings, making it, I believe, an exceptional value.
Cars, Tech and Sportswear Driving Growth
We believe our exposure to Chinese automakers and tech firms makes USCOX well-positioned for long-term growth. Not only is China the largest passenger car market in the world, it was also the fastest growing. In the first eight months of this year, auto sales in the country were up close to 5 percent compared to the same eight months in 2016, according to the China Association of Automobile Manufacturers. Geely, which completed its acquisition of Volkswagen in 2010, sold 718,000 vehicles during this period, an amazing 88 percent increase year-over-year.
Tech manufacturers, especially those that supply Apple, look very attractive. Our favorite right now is Sunny Optical, which specializes in lenses for a number of advanced applications. The company announced that shipments of handset lenses surged 96 percent in August, while vehicle lenses rose 65 percent. For the 12-month period as of September 22, its stock was up 264 percent.
We’re also fans of Anta Sports Products, China’s largest sportswear company by revenue. By selling pricier athletic gear under its Fila brand, the company is seeking to capitalize on rising incomes and the Chinese government’s push to boost participation in sports. According to Bloomberg, the government aims for 435 million of its citizens, a third of its population, to work out more frequently by 2020. This bodes well for Anta.
The sportswear company is among our top 10 holdings.
Article by Frank Holmes