Sunday, October 11, 2015

2015-09 Stock Market Valuation

In September, the decline in the gold price of Chinese equities that began at the end of May continued for a fourth month, although the index is still up 35.5% from twelve months ago.  The valuation of the index dropped from 39.84 times earnings in August to 38.38 times earnings in September.  The renminbi price of the index fell from ¥1,790.31 in August to ¥1,716.78 in September, and the renminbi depreciated further against the U.S. dollar from ¥6.3383 in August to ¥6.3685 in September.  For international investors, this was partially off set by a decline in gold prices.

The big news for September was that the Federal Reserve did not raise interest rates.  The Federal Reserve's reason was given as:
"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad."
This will partially slow the flow of financial capital out of emerging markets.  Given that dividends on many stocks are now higher than fixed income products, funds should be malinvested back into Chinese equities.