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Chinese Stocks

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

When seeking better-than-average growth, many investors flock to emerging markets. In emerging markets investing, Chinese stocks are 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.

Chinese stocks are perhaps 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 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 Chinese stocks have going for them. Many of them 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.

Five years of leveling off has caused Chinese stocks to become attractively priced, and actually undervalued. That’s clearly how Wall Street is viewing them. In the past year, the SSE has risen 85%, surpassing its 2009 highs. Investors are flocking back to Chinese stocks in droves.

If you want to learn about some of the very best Chinese stocks, you may want to consider subscribing to our Cabot Global Stocks Explorer. In this advisory, analyst Paul Goodwin recommends stocks from a variety of emerging markets. But his primary focus is China.

Paul seeks out Chinese stocks benefiting from the country’s fast-growing economy. Many are based in China; others are American or European companies with large operations in China. Regardless, all of the Chinese stocks Paul recommends trade on U.S. exchanges.

To learn more about the Cabot Global Stocks Explorer, click here.

Though down considerably from their pre-global recession levels, Chinese stocks have still outperformed most major indices since the turn of the century. Now that investor sentiment has returned, China should continue to be a great place to invest for years to come.

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Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.