What a year 2010 has been! And through all the ups and downs in the global markets, China has stood out as a major player on the world stage. In fact, right now China’s economic growth is matched by no other major economy in the world, and the wealth potential there is life-changing.
Looking ahead to 2011, my top China picks is China National Offshore Oil Company (NYSE: CEO) — China’s offshore exploration and production energy giant and the most dynamic of China’s Big Three state-owned energy giants. Let me tell you why I am so bullish on CNOOC in the new year:
Inflation, the Major Socio-Economic Trends at Play: While it is impossible to predict the future, it is possible to extrapolate how existing major socio-economic trends will continue in the year ahead — and more importantly, the best way to profit from these trends. Right now, rising inflation is by far one of the most important economic trends in China — and indeed, the world. Fortunately for China, the negative impact of inflation is partially offset by wage increases and the positive wealth effect — but in the U.S. and Europe we are unlikely to see a significant increase in the jobs outlook and wages to counter the soaring living prices. And the Fed’s aggressive liquidity pumping will further add fuel to the inflationary fire.
Commodity and Emerging Market Stocks Will Soar: Against this inflationary backdrop, investors in the right commodity and emerging market stocks will be well-prepared. I expect that the current commodity bull market will continue, and that we’ll see a return to $100 oil in 2011. A big driver of higher oil prices is China’s oil consumption — growing rapidly as the Chinese economy has led the global recovery. This has primarily been supported by a rising demand for fuel due to strong auto sales, electricity usage and construction of infrastructure.
Best Bet On China’s Oil Production: And the best way to take advantage of the strength in China’s oil production industry is by investing in China National Offshore Oil Company, or CNOOC for short. This stock is a state-owned enterprise that has a mandate to acquire and develop oil assets off the coast of Mainland China. CNOOC is also dedicated to acquiring energy assets around the world — more so than any other company in China. You see, CNOOC carries the distinction of being the only oil company in China permitted to conduct exploration and production activities offshore in conjunction with foreign governments and companies.
CNOOC’s Competitive Advantage: CNOOC has monopoly drilling rights on huge undiscovered reserves of oil and natural gas in the South China Sea. More than 70 international oil companies have teamed up with CNOOC to win rights to drill in the area. CNOOC also has a special government-granted power to acquire up to 51% interest in any offshore oil and gas discovery in China’s jurisdiction at no cost — even when the discovery is made by a foreign company. With new oil and gas found in the South China Sea by international companies every day, CNOOC gains new energy assets without having to pay a dime. Talk about a competitive advantage – it is no wonder the stock is up nearly 300% in the past five years, and 60% this year alone!
Western Corporate Influences: Finally, CNOOC is one of the few state-owned enterprises with American-style corporate governance — making it one of the most transparent SOEs in China. As an international exploration and production company, CNOOC focuses on upstream operations (supply), meaning its profits are not adversely affected by China’s state-mandated gasoline price controls. And as demand for oil increases and new discoveries are made in the South China Sea, I expect CNOOC will be a top performer in 2011 as well.
Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.
Robert Hsu is the editor of the China Strategy and Asia Edge newsletters. As of this writing, Robert was recommending CEO to his paid newsletter subscribers.