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Comment: Slower US economy, European debt restructuring and an economic cool-down in China continue to impact markets

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While Chinese inflation is still rising and the recent drought in central China may cause food prices to increase again, we do not expect inflation to reach excessive levels.

The latest positive PMI data (in May) indicated that investors’ concerns for Chinese economy were exaggerated, as underlying economic numbers, although slowing, remain relatively robust. We expect Chinese companies to report good earnings in the upcoming interim reporting season, which should support share prices.
 
China’s market is demonstrating attractive valuations, with expected earnings growth of 17%. The fund will continue to focus on companies with domestically focused operations, less policy risks, and potential upward revision for earnings forecast to outperform, for example such retailers.

The DWS Chinese Equities Fund recently reduced its weighting in materials and machinery stocks and added to property and Internet companies who demonstrated strong sales growth. The fund’s underweight position in heavy industrial stocks (especially machinery stocks) and its overweight position in coal and 3G-related telecom stocks helped recent outperformance. The fund has delivered 57.2% since inception on 15 December 2006 (as at 31 May 2011).
 
The DWS Invest Chinese Equities fund is currently overweight in:
consumer discretionary – focusing on inflation beneficiaries, especially retailers with strong same store sales growth; IT – we are positive on Internet and IT servicing companies which provide strong secular growth with little policy risk; and healthcare – we are focusing on companies with leading, innovative products which are less affected by government price controls.

The fund in underweight in: financials – the government will maintain a relatively tight credit policy in the coming months, making the stocks less attractive; consumer staples – we have margin pressure concerns, as costs are rising alongside government restrictions on companies’ ability to increase product prices; and materials – slower US demand and slower growth in fixed-asset investments in China are negatively impacting the sector.

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