This Opens the Floodgates to the 'New Nasdaq'

Few saw it coming. But many folks have made money from it anyway...

I'm talking about the recent – and seemingly unstoppable – bull market in technology-related stocks.

The tech-heavy Nasdaq Composite Index is up 27% over the past year. That compares with a 2% drop in the Dow Jones Industrial Average, and a paltry 7% gain in the S&P 500 Index.

Tech stocks are doing extremely well for a good reason...

The coronavirus pandemic either shut down or severely impaired most of the economy. The only thing keeping the gears turning – and consumers spending – has been technology.

People avoid brick-and-mortar stores, but they still make purchases online. Working from home is no longer the exception to the rule – and it's only possible through technology. Even video games are experiencing an unprecedented surge in demand, as tens of millions of kids – and adults – stay home.

As a result, even as "old economy" companies struggle, growth is taking place elsewhere. And U.S. investors have been able to capitalize on this growing trend in use of technology.

But the U.S. isn't the only country where the use of technology is growing by leaps and bounds. China's use of technology is growing exponentially, too.

Let me explain...

China's rate of technology adoption, in many aspects, surpasses that of any other country in the world.

Already, 20.7% of Chinese retail sales took place online before the pandemic struck. That's roughly double the level in the U.S.

Most of the Chinese living in cities no longer carry wallets. Instead, they use their smartphones to pay for everything via their WeChat or Alipay mobile apps. They can even buy cars – and have them delivered – through their smartphones!

Whether that's a good or bad thing, it's eons ahead of the way most Americans pay for things on a day-to-day basis.

China is also leading the world in things like online health care, robot deliveries, cashier-less supermarkets, and self-driving cars.

Still, when it comes to the stock market, Chinese tech stocks are far behind the U.S. This part of the market has yet to fully reflect these eye-opening realities.

But that's about to change...

About a year ago, China launched the STAR Market, an exchange patterned after the Nasdaq. (In fact, my colleague Steve Sjuggerud dubbed it the "New Nasdaq" for just this reason.)

It was designed to give China's most innovative and promising technology companies a place to list their shares and raise capital for expansion.

The STAR Market started with just 25 companies making initial public offerings ("IPOs"), with a combined market capitalization of less than $100 billion.

The first day the exchange opened for business, the average IPO gained 140%.

Today, almost a year later, nearly 120 companies are listed on the STAR Market. Their combined market cap exceeds $300 billion.

And there are over 300 more companies on the launching pad, waiting to get listed.

But aside from how new it is, there's one big difference between the STAR Market and the Nasdaq stock exchange... Until now, the STAR Market has no equivalent to the Nasdaq Composite Index. It has no index tracking its performance.

That means there's no index for investors to see exactly how well – or poorly – the biggest companies listed on the STAR Market are doing. And, by default, it also means there's no index that could be used to create an exchange-traded fund ("ETF") around.

For instance, consider the Invesco QQQ Trust (QQQ). It tracks the 100 largest stocks on the Nasdaq. And like the Nasdaq, this ETF is up double digits – roughly 35% over the past year.

Right now, investors who want to invest in the biggest STAR Market names would have to buy shares in each one of them separately. That's both costly and time-consuming.

As a result, the STAR Market is potentially leaving billions – if not tens of billions – of dollars on the table... money that could be pouring into its biggest companies.

But on July 22, the first anniversary of the STAR Market, China will officially launch the STAR 50 Index.

The three biggest stocks on this soon-to-be-launched index have already gained about 209%, 232%, and 56% over the past year. Yet, their combined market capitalization is barely 1/25th that of Apple (AAPL).

If an ETF designed to track the STAR 50 Index took in even one-tenth of the amount invested in QQQ, we could see a huge rally in Chinese technology stocks.

This means that while there appears to be a raging bull market in U.S. technology stocks, there's an even bigger bull market in China's "New Nasdaq," just waiting to be unleashed.

This is another reason to keep your eye on China's STAR Market. The floodgates are about to open.

Good investing,

Brian Tycangco

Further Reading

"Companies like these will almost certainly attract a lot of investor interest, both local and foreign," Brian writes. With more and more businesses listing on the STAR market and foreign funds being able to trade shares, we could see a torrent of money flowing into China's stock market... Get the full story here: What the Media Is Getting Wrong About China's 'New Nasdaq.'

Steve has long predicted the potential the STAR market holds for Chinese stocks. He believes it could lead to the biggest boom since the dot-com bubble. To find out why, check out his two-part series here and here.

Market Notes
HIGHS AND LOWS

NEW HIGHS OF NOTE LAST WEEK

Apple (AAPL)… iconic tech brand
Sony (SNE)… entertainment and gadgets
AbbVie (ABBV)… pharmaceuticals
AstraZeneca (AZN)… pharmaceuticals
Quest Diagnostics (DGX)… medical data
ResMed (RMD)… medical devices
Danaher (DHR)… medical supplies
Costco Wholesale (COST)… membership-only stores
Church & Dwight (CHD)… household products
Home Depot (HD)… home improvement
Linde (LIN)… industrial gases
Rollins (ROL)… pest control
McCormick (MKC)… spices
General Mills (GIS)… food products
Papa John’s (PZZA)… pizza

NEW LOWS OF NOTE LAST WEEK

Not many… The market has been rallying from its recent lows.