Emerging markets were the hottest thing going for a while -- until the financial collapse drove shaky investors out of foreign investments. In both cases, China led the pack.
Chinese stocks have rebounded strongly from their lows, but they've also tumbled rapidly in the last few months, amid fears about commodity prices and an oversupply of shares.
So what is the real deal with China?
Some of the best investors of our time think China is the place to be. George Soros called China "the opportunity of a lifetime." In 2008, the master of taking advantage of opportunities, Warren Buffett, noted that "U.S. companies may have a lot to learn from China, which is just realizing its potential." Not a bad compliment from the Oracle of Omaha.
A good rule of thumb? Always listen to Buffett! Over the past year, China's index -- which includes such companies like PetroChina (NYSE:PTR) and China Mobile (NYSE:CHL) -- has returned 26%, compared with 2% for Brazil (another strong emerging market) and a 19% loss for the S&P 500.
There are good reasons for these numbers -- and good reasons why investing in China arguably gives you the best chance to realize astounding returns.
- With the world's largest population and workforce, China continues to develop economically. As the government becomes more and more committed to driving domestic demand, businesses will see increased opportunities to flourish and expand their operations.
- Asian economies, and China's in particular, have been extraordinarily quick to spring back from the devastating recession. Although every country undoubtedly felt the ripple effect of a crippled global financial system, the speed and strength of China's rebound shows that it's not chained to Uncle Sam, either.
Bottom line: There's a lot of room for growth there.
But is it just too hot?
But like the sizzling bacon I always try to grab straight from the skillet, China seems a bit too hot to handle -- especially lately.
The Chinese stock market has risen nearly 60% since Jan. 1 of this year, significantly overshadowing the developed-markets rebound of about 10%. Many economists are beginning to fear that emerging market economies are experiencing an unsustainable upturn.
And in addition to all of that, China still has a terrible reputation when it comes to corporate governance and transparency. According to a World Bank study of 181 countries, Chinese companies rank 130th in terms of tax compliance, and a frightening 93rd in protecting shareholders and investors.
Despite all that, I still think you should invest in China.
Finding good opportunities amid the hype
If you want to profit from China, you've got to take all the facts into account -- both the recent run-up and the room for growth.
Certainly, Chinese stocks have recovered sharply from earlier lows; the days of finding astronomical returns with relative ease are definitely over. But there are still companies available for lower multiples than you'd expect. That is a promising sign for those willing to invest -- and the next Baidu (NASDAQ:BIDU) or AgFeed Industries (NASDAQ:FEED), both of which delivered walloping returns this year, are out there to be found.
So if you don't want to get a bad case of indigestion from investing in China, here's the secret: Don't eat the entire pie. Just look for a good slice or two. Rather than investing in the country as a whole, look for excellent individual companies that are poised to profit from the country's growth without being dragged down by either regulation or overvaluation.
If you're too nervous to invest directly in Chinese stocks, you can always purchase large-cap companies -- for example, Yum! Brands (NYSE:YUM), Intel (NASDAQ:INTC), or NVIDIA (NASDAQ:NVDA) -- that have considerable exposure to the region. You probably shouldn't expect the type of overwhelming results illustrated above, but the growth will still apply.
Right now my colleagues are looking at a long list of Chinese stocks, in hopes of finding the right slice at the right value. In fact, our Motley Fool Global Gains team recently got back from China, where they did the homework, met with management, and evaluated operations on the ground. That's why they're so confident in their suggestions. To see what we're recommending, click here to try Global Gains free for 30 days. There's no obligation to subscribe.
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Fool contributor Jordan DiPietro doesn't own any of the stocks above, but takes personal pride in his consumption of Chinese snow pea leaves. Baidu is a Motley Fool Rule Breakers recommendation. Intel is an Inside Value recommendation. NVIDIA is a Stock Advisor selection. The Fool's disclosure policy went on the trip to China and snuggled with a golden-haired monkey.
