Please ensure Javascript is enabled for purposes of website accessibility

Investing in Chinese Stocks 101

Investing in Chinese Stocks 101

Have You Considered Investing in Chinese Stocks? Here’s What to Think About Before You Buy.

When seeking better-than-average growth, many investors flock to emerging markets. In emerging markets, investing in Chinese stocks is your best bet.

Emerging-market economies are growing faster than the U.S. economy. Thus, investing in the companies based in those emerging markets – or the ones that derive a large portion of their revenue from emerging market sales – is a good way to earn market-beating returns.

But there’s a catch. You don’t want to invest in just any emerging market. After all, these markets are still “emerging” for a reason. In reality, the word “emerging” is a euphemism for “underdeveloped.” Anytime you invest in an underdeveloped nation, you take on an increased measure of risk – more than you would investing in an American blue-chip company. Investing in Chinese stocks is one of the safer markets, which we’ll explain below.

[text_ad]

Why Is Investing in Chinese Stocks the Safest Way to Invest in Emerging Markets?

The so-called “BRIC” countries – Brazil, Russia, India and China – are considered the most powerful emerging market nations. All four have enormous (and growing) populations, stable governments and fast-expanding economies. Of that group, China has proven to be the most reliable.

China enjoyed more than a decade of double-digit economic growth based on cheap labor and massive exports, and its huge population of industrious people, directed by a powerful central government, has created a booming middle class eager to achieve the prosperity of developed nations. The country has made major investments in infrastructure and looks ready to deliver GDP growth of close to 7% (or more) for the foreseeable future.

Amid China’s economic boom, Chinese stocks have soared. Among the BRICs, only India has posted bigger gains in the last decade. India’s potential in the coming years is undoubtedly immense.

However, India suffers from a political system that is chronically susceptible to gridlock, thus making its stocks less predictable – and more volatile – than Chinese stocks.

To be sure, China’s economic growth has slowed. From 2000-2010, China averaged 10% annual GDP growth. The 7% annual growth expected over the next decade-plus amounts to a fairly substantial step back.

But no economy – even an emerging one – can grow at 10% a year forever. Besides, 7% is a much faster growth rate than the U.S. economy, which is expected to grow in the low single digits annually over the next 10 years.

Plus, there’s one other thing investing in Chinese stocks has going for it. Many Chinese stocks have struggled in recent years. From July 2009 until April 2014, Chinese stocks – as measured by the benchmark Shanghai Stock Exchange (SSE) – actually declined 40%, or more than 8% a year. In the long term, the pullback may have been a good thing.

The Risk vs. the Reward When Investing in Chinese Stocks During a Trade War

In How to Use U.S.-China Trade War Market Volatility to Your Advantage, Chris Preston, Cabot Wealth Network’s Managing Editor and Chief Analyst of Cabot Wealth Daily, writes: “The U.S.-China trade war is a momentary concern for investors—one that bubbles to the surface every so often like a boiling pot of water, only to fizzle when the temperature is turned down.”

Buying Chinese stocks is always risky, and investing in Chinese stocks during a trade war is definitely not for the faint of heart. Still, since risk and reward always walk hand in hand, there are also huge opportunities for investors with a high risk tolerance (and a handy set of selling rules). You just need to know which Chinese stocks to buy, which you can learn when you subscribe to Cabot Global Stocks Explorer.

[text_ad]

Cabot Wealth Network