Sunday, July 12, 2015

2015-06 Stock Market Valuation

The Shenzhen Composite ended June at 0.34 gold ounces. Although it was down from May’s close of 0.38 ounces, June’s close is still the second highest price paid for the index in the series. The price-to-earnings ratio was 54.28, considerably lower than May’s 61.41 times, but still high. Although the index lost 10.64% over the last month, it is still up 152% over the last year. The gold price fell faster than the price-to-earnings ratio, meaning earnings stayed mostly flat from last month.

The big story in June was the drop in tech company valuations. According to Bloomberg:
"A rally in Chinese technology companies is reversing at the fastest pace in at least a year on concern valuations are too high relative to earnings growth. … The CSI 300 Information Technology Index has plunged 19 percent from its June 2 record, almost twice the 12 percent loss by the broader gauge. Even after the declines, the hi-tech measure trades at 74 times earnings, versus 31 times for the Nasdaq Composite Index in the U.S. The Chinese gauge sank 6.3 percent by the close Thursday, while the Shanghai Composite Index declined 3.5 percent. … Beijing Shiji Information Technology Co. has lost 31 percent since June 2, wiping out around $3.5 billion of value. The stock still trades at more than 100 times earnings. Leshi Internet Information & Technology (Beijing) Co. has plunged 28 percent in the period, paring its gain this year to 251 percent."
The run-up in Chinese equities is beginning to impact overseas equity markets as well. After initial public offerings by Chinese companies in the U.S. hit a record high in 2014 of $29 billion, 2015 has seen a reversal of the trend. In June alone, $22.6 billion worth of deals were agreed on to take Chinese companies listed in the U.S. private again so that they can be re-listed in China at higher valuations.[1] The risk for Chinese companies is that if they borrowed money to take U.S.-listed companies private and then are unable to list in China, or list at expected valuations, they will be in much worse situations than if they had remained listed in the U.S.