Chinese stocks are again attracting increased attention. Over the last few weeks, there have been several new Chinese Initial Public Offerings (IPO) coming to the market that debuted well above the IPO price and then surged. These include Country Style Cooking Restaurant Chain Co., Ltd. (NASDAQ/CCSC), an operator of fast-food eateries. The stock was priced at $16.50, but debuted at $25.00 on September 28 and surged to $32.50 before settling back to the current $26.00 level. I feel that the buying was way too optimistic. Chinese online real estate portal SouFun Holdings Limited (NASDAQ/SFUN) debuted at $67.00 on September 17, and surged to $74.00 before retrenching back to the current $62.00 level.
The IPO action indicates that there continue to be speculative trading and excitement towards Chinese companies, something that I maintained in spite of the 18% decline in the Shanghai Composite Index (SCI) this year. The key is patience and buying on weakness.
The International Monetary Fund is positive on global growth, especially in the emerging markets. The IMF downgraded its GDP estimate for the U.S. to 2.6% in 2010 and 2.3% in 2011. Europe is also predicted to see slower relative growth versus the emerging economies. The star will continue to be China, where the GDP is estimated to expand by 10.5% this year and 9.6% in 2011. There is really nothing new here, as China, India and the emerging markets in Latin America will be the hot spots for capital.
In my view, China continues to offer incredible investment opportunities. Add in the fact that China is a neighbor of the world’s second most populous country, India, where there are also excellent growth opportunities with over 1.1 billion people and excellent growth prospects. Imagine the combined markets when the disposable incomes in both countries rise.
The key in China will be the rapid growth of its middle class. In a recent research finding, Credit Suisse predicted that the household wealth in China will double to $35.0 trillion by around 2015, based on achieving sustainable GDP growth at or near the current levels.
I continue to believe that there are good buying opportunities in Chinese stocks, specifically of the small-cap variety. However, you need to be cautious, and take a look at buying value at the current price levels. I have emphasized the need to have capital in China (or at least in companies with a presence in China). Chinese stocks that are listed in the U.S. will continue to represent an excellent area for growth investors, yet you also need to be careful and be diversified in your portfolio, as there could be more downside risk.