These 2 Nasdaq actions pave the way for the biggest opportunity of 2021
Most people think that the US stock markets offer stocks of US companies. The New York Stock Exchange, the Nasdaq Stock Market, and smaller exchanges certainly have thousands of US companies trading stocks on their electronic networks and in the trading rooms.
Yet the Nasdaq Composite (NASDAQINDEX: ^ IXIC) and the Nasdaq-100 Index don’t just have stocks of US-based companies in their ranks. You will find world famous companies in both indexes. And it turns out that Wednesday was a sterling day for two companies in a country that investors haven’t really focused on in 2020: China.
The top two performers in the Nasdaq-100 index were both from Chinese companies. Online research specialist Baidu (NASDAQ: BIDU) led the way with gains of almost 11%. Meanwhile, an e-commerce business Pinduo (NASDAQ: PDD) weighed in with a gain of over 6% on the day.
The immediate catalyst for today’s gains the news seemed to come on the diplomatic front. China has worked with the European Union to strengthen trade relations, especially with the two regions that have faced growing trade tensions with the United States in recent years. The culmination of these efforts came in the form of a new trade and investment agreement, which is expected to facilitate the flow of capital and goods from the EU to China.
However, today was not the start of the surge in these Chinese stocks. Baidu shares have doubled since late May, recovering strongly from the coronavirus bear market. Pinduoduo shares have performed even better, doubling in the past two months.
Are Chinese stocks good value?
There are plenty of reasons for US investors wary of Chinese stocks. Painful episodes of fraud have taught foreign investors to be careful with their investments in China, with examples like Lucky coffee being just the latest in a long line of troubling situations that have caught investors off guard.
However, US investors’ lack of comfort with Chinese stocks has manifested itself in their valuations. Even after its recent surge, Baidu is still trading at just 17 times its profits, compared to more than double that valuation for its US online search rival. Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).
In addition, China has enormous potential for growth. Even in high-growth fields like e-commerce that command premium valuations, companies like Pinduoduo arguably have more leeway than their counterparts focusing on the US market.
Keep your eyes on China
With the US stock market holding up very well in 2020, investors have already gotten a head start to celebrate better times in 2021. For those who want to be before trend, however, it might make sense to take a closer look at Chinese stocks. The diversification that you can achieve by having international companies in your investment portfolio can improve your long-term returns while providing you with a smoother ride along the way. In particular, Pinduoduo and Baidu seem to have more opportunities for expansion in the coming year and beyond.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.