Chinese Stocks: Too Late to Jump on the Bandwagon?
On the one hand:
The number of Chinese stocks in the US is mushrooming, particularly through reverse mergers. It reminds me of the late stage Internet bubble when any online startup with a business plan on a napkin got funding and IPO'ed. How many Chinese IPOs can the US market support?
On the other hand:
The Internet was just one sector that got saturated fast with increasingly ridiculous overpriced money-losing offerings. The Chinese economy is huge, and most Chinese companies trading in the US are in brick-and-mortar industries, from construction materials to consumer electronics. The breakneck pace of Chinese economic growth is still primary: the emerging middle class wanting access to new products and services - clothing, gadgets, cars, apartments, hotels, cosmetics, restaurants... There are over 10,000 stocks in the US representing this kind of breadth, and the market is not sagging. A few hundred Chinese companies will barely make a dent.
Chinese stocks are cheap by any measure of valuation, and many are extremely profitable, with earnings growth sometimes in excess of 100%. (Whether or not you believe those numbers is a different story.)
The Chinese government's numerous initiatives to cool the economy have so far produced periodic scares and selloffs but no lasting effect. After all, China is not about to cut off the branch it is sitting on. Sooner or later, the growth will slow; sooner or later the economy will hit a snag. But when? Maybe years from now.
In the end, the answer is simple: as long as Chinese stocks continue to offer huge profit opportunities, there is no reason NOT to invest in them. No need to try to predict when the Chinese run will end as long as the sell is only a click away. The more important question is how to invest in Chinese stocks since they are known for their volatility.
Published by Slav Fedorov
Full-time stock trader and founder and managing member of TradingZoom, LLC, a provider of timely stock picks to part-time traders. Former banker, stockbroker, financial planner, with over 20 years market ex... View profile
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