Sunday, August 9, 2015

2015-07 Stock Market Valuation

In July, the gold price of the Shenzhen Composite fell for a second straight month.  It is now back to where it was in April, but still up 112% over the previous twelve months.  The closing price for July was 0.31 gold ounces, down 0.03 ounces from June.

Up until very recently, all of the factors related to viewing the value of the Chinese stock market in this way were falling into line to inflate the index.  Most importantly, the valuation of Chinese equities was increasing.  After ending 2014 at 34.05 times earnings, the price-to-earnings ratio peaked out on a month end basis at 61.41.  Second, the U.S. dollar price of gold has been declining for four years.  Lastly, the exchange rate with the U.S. dollar has remained stable.

In the coming months, the cashflows of Chinese equities will be further discounted, gold will resume its bull market, and the renminbi will devalue significantly.