What the Greatest Long-run Opportunity Going Is

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

The broader market keeps ticking higher and so do a number of U.S.-listed Chinese stocks. In fact, a number of these stocks that traded flat during the second quarter have appreciated significantly in value in recent weeks. Clearly, enthusiasm for Chinese stocks remains strong. However, I would say that, because of this capital appreciation, valuations are becoming much less attractive. Because of this, it is becoming less attractive to be a new speculator in this market at this particular point in time.

There was some good news from China this past week, as officials reported that the Chinese economy grew over seven percent in the first nine months of this year. This is significant, because the previously anticipated target was eight percent for total 2009 annual growth and this makes this target easy to beat.

While the country is so far away geographically, what happens in the domestic Chinese economy does matter now to investor sentiment on Wall Street. Like the U.S. economy, China is slowly becoming a benchmark on global growth.

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According to the economic data, China’s domestic trade, housing market, manufacturing and car sales are all improving right now. Weakness remains in the export market and this is because global demand for Chinese goods has been affected by the recession in all Western countries.

Previously, I’ve written in this column how China’s economy is slowly transforming itself into a domestic-demand-driven economy. This is a natural progression for an economy as individual incomes grow.

As an investor or speculator, you want to be participating in this transformation and one of the best ways to do this is through U.S.- listed Chinese stocks. A lot of Chinese companies want exposure to U.S. capital markets, and not just for the large pool of investor capital. I get a real sense in analyzing these companies that entrepreneurs in China feel that listing on U.S. stock exchanges contributes to legitimizing their corporate structures. Because the economy over there is still somewhat of a Wild West adventure, Chinese companies need the strong reporting requirements that are inherent in a U.S. equity listing.

Both sides are winning because of this trend. Chinese companies raise money from U.S. and other global investors, and we as investors get the opportunity to trade these securities, which would not be as easy if they raised money in Asia.

The future is very bright for a lot of these companies and their investment prospects remain strong. While valuations are quite lofty right now, this sector of the equity market still represents the greatest long-run opportunity over the coming years.