April 13th Weekly Market Update

China will release its first quarter 2015 gross domestic product (GDP) report this week on April 14, 2015, with the market expecting a 7% year over-year increase. Regardless of whether China hits that target, its stock market has already been positive so far this year. In this year of the goat in 2015, global investors have not been sheepish about buying Chinese stocks, powering the Shanghai Composite 25% higher so far in 2015 amid prospects for more monetary stimulus and policy reforms. These gains came on top of last year’s solid performance, when the Shanghai Composite surged 49%. The recently launched trading link between mainland Chinese markets and Hong Kong and low oil prices have also been factors, all of which beg the question: Will this strength continue?

In our November 18, 2014, Weekly Market Commentary, “Emerging Markets Opportunity Still Emerging,” we highlighted that emerging markets (EM) fundamentals were poised to improve with help from policy actions.  Valuations were attractive and there was strong mean reversion potential; both factors are still in place. At the time we were waiting for several developments before becoming even more positive on EM, including better relative strength,
improving earnings, and stable oil prices.

Based on these factors, EM looks better to us than it did last fall. Relative strength has improved and EM is trading at a 25% discount to the S&P 500’s forward price to-earnings ratio (PE). But earnings have shown little improvement and oil remains historically oversupplied and volatile. We feel good about our positive EM view, but are hesitant to turn much more positive at this time.

We also wrote in November 2014 that we favored emerging Asia over Latin America due to the better combination of economic and earnings growth, current account surpluses, and the benefits of lower oil prices. Within Asia, we believe China offers a favorable combination of profitability and low valuations.

For the full article: CHINA: NEW YEAR, NEW OPPORTUNITY?