Increasing Chinese investment in Europe is on the horizon. Debt worries continue to plague the European Union. Chinese investment in Europe will go forward as the nation with cash reserves cherry picks attractive companies. China is following the script written by the USA in the years following World War II. They offer foreign aid and stimulate local industry with infusions of capital. China needs raw materials for its industrial machine and provides mining companies and agricultural suppliers with an attractive and growing market. Now, as the Asian power house seeks to upgrade its high tech sector, a foray of Chinese investment in Europe comes at a time when the Europeans need cash. A good investment opportunity today may well be in any number of European stocks likely to be purchased during a Chinese buying spree.
For those interested in profiting from Chinese investment in Europe here are a few thoughts. A large purchase of stock in any European company will drive its stock price up. Fundamental analysis will help investors spot underpriced stocks in market sectors in which China is weak. Thus an investor will be well advised to look for attractive European stocks with low price to earnings ratios. High tech companies could well be a large part of Chinese investment in Europe as well. Here a little background will be useful to the investor. The USA has mechanisms in place to block acquisitions of high tech companies by foreign entities. The European Union does not. There have been blocked attempts of Chinese investment in Europe in high tech. However, these have required diplomatic pressure by other nations. Europe has no single governing body that oversees such foreign investments like the US Committee on Foreign Investment. When a Chinese company bids for a European high tech company there will likely be a lot of politics involved and no clear outcome. This could result in a volatile stock with the potential for large profits or large losses.
How to make money through investments in Europe could be with an options strategy. Buying calls on suspected Chinese investment targets will provide the investor with the right to purchase stock at the current value even if a bid by a Chinese company drives the stock price up. The investor will limit his down side risk to the price of the options contracts purchased. The talk these days about the Euro centers on the Greek debt crisis. There is speculation that China may step in and help support a bailout effort. This is a page from the USA playbook of years ago. Such a move tends to gain a great deal of good will as well as the headlines. When public attention is on the generosity of the helping party, Chinese investment in Europe may well go forward unimpeded. A resolution of the Greek debt crisis could also stabilize the Euro. This would also raise the value of European stocks as priced in dollars. Thus the purchase of American Depository Receipts of Europeans stocks could be an easy way to profit from Chinese investment in Europe. As always we are not suggesting that the investor buy European stocks, the Euro, or American Depository Receipts. Rather we offer a way to look at potentially profitable investments.