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Emerging Market Equities See Valuations Fall on China Slowdown

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Valuation movement

Emerging market equities are trading at 9.9x on a one-year forward earnings basis. Valuations fell 2.72% in the week ended September 4, 2015. The fall was due mainly to a slowing Chinese economy and falling commodity prices and exports.

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China and India

China’s manufacturing activity fell further with its official PMI (Purchasing Managers’ Index) falling to 49.7 in August compared to 50.0 in July. The country’s labor market also deteriorated in August on lower manufacturing activity, calling for further intervention from leadership and the central bank to support growth.

India’s equities saw valuations fall on a lower GDP (gross domestic product) growth rate of 7% in 2Q15 compared to 7.5% in July. The Indian economy is pushing for higher manufacturing growth through programs such as Skill India and Make in India. The nation has seen good growth in foreign direct investments in defense, industrials, and infrastructure.

Historically, emerging market equities (EEM) have been valued at a discount compared to European (EFA) and US equities (SPY). The discounts have continued in the last few months on a steep fall in commodities and emerging market equities.

Monetary measures

China has resorted to a series of interest rate cuts and fiscal easing in order to push for higher growth. However, the monetary easing hasn’t helped stem falling equities. China’s Shanghai Composite fell 2.23% last week. Investors around the world sold off equities and parked their funds in bonds, gold, and US equities.

Asset managers will have to redeploy their capital in the short to medium term to take advantage of the shifts in these emerging market economies.

Asset managers that could benefit from emerging market equities’ strong performance include Franklin Resources (BEN), BlackRock (BLK), Fidelity Investments, Goldman Sachs (GS), HSBC Global Asset Management (HSBC), and Blackstone (BX).

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