Most people think of U.S. stock markets as offering shares of U.S. companies. The New York Stock Exchange, Nasdaq Stock Market, and smaller exchanges certainly have thousands of American businesses trade shares over their electronic networks and on trading floors.
Yet the Nasdaq Composite (^IXIC -0.12%) and the Nasdaq-100 Index don't just have shares of U.S.-based companies among their ranks. You'll find world-renowned companies in both indexes. And as it happens, Wednesday was a sterling day for two companies in a country that investors haven't really focused on very much in 2020: China.
Look to the east
The two best performers in the Nasdaq-100 Index were both Chinese companies. Online search specialist Baidu (BIDU -0.09%) led the way higher with gains of almost 11%. Meanwhile, e-commerce company Pinduoduo (PDD -0.67%) weighed in with a gain of more than 6% on the day.
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The immediate catalyst for today's gains seemed to come from news on the diplomatic front. China has been working with the European Union to bolster trade relations, especially with both regions having faced increasing trade tensions with the U.S. in recent years. The culmination of those efforts came in the form of a new trade and investment agreement, which should have the effect of making it easier for capital and goods to flow from the EU to China.
However, today wasn't the beginning of the surge for these Chinese stocks. Baidu shares have doubled since late May, recovering sharply from the coronavirus bear market. Pinduoduo shares have fared even better, doubling in just the past two months.
Are Chinese stocks a good value?
There are plenty of reasons for U.S. investors to be wary of Chinese stocks. Painful episodes involving fraud have taught foreign investors to be cautious in their investments in China, with examples like Luckin Coffee being only the most recent in a long series of troubling situations that caught investors unawares.
However, the lack of comfort among U.S. investors in Chinese stocks has shown up in their valuations. Even after its recent surge, Baidu still trades at just 17 times trailing earnings, compared to more than twice that valuation for U.S. online search rival Alphabet (GOOG -0.21%) (GOOGL -0.30%).
Moreover, China has huge growth potential. Even in high-growth areas like e-commerce that command premium valuations, companies like Pinduoduo arguably have more room to run than their counterparts focusing on the U.S. market.
Keep your eyes on China
With the U.S. stock market having held up very well in 2020, investors have already gotten a head start on celebrating better times in 2021. For those who want to be ahead of the trend, though, it might make sense to look more closely at Chinese stocks. The diversification you can get from having some international companies in your investment portfolio can improve your long-term returns while giving you a smoother ride along the way. In particular, both Pinduoduo and Baidu look to have more opportunities for expansion in the coming year and beyond.
