Global Equities Sell-Off Continues as China's Economy Slows Down
Higher valuations
US equities (SPY) are trading at 14.6x on a one-year-forward earnings basis. Valuations fell 3.7% in the week ended September 4, 2015. They were revised due to less growth in emerging markets, a slowdown in China’s economy, and weaker US manufacturing activity.
The US final Markit PMI (Purchasing Managers’ Index) for the services sector rose to 56.1 in the month of August. This compares to 55.7 in July. However, the manufacturing PMI fell to 53.0 compared to 53.8. The composite PMI was flat for the month of August.
Growth in the service sector pushed for a lower unemployment rate. The US economy’s unemployment rate fell to 5.1% in August, the lowest in more than seven years. Average hourly earnings grew marginally by $0.08, and average weekly hours worked increased to 34.6.
Canada’s GDP and trade deficit
Canada’s GDP (gross domestic product) fell at an annualized pace of 0.5% in 2Q15 compared to 0.8% in the prior quarter. The nation’s GDP growth improved toward the end of the quarter. In June, Canada’s GDP rose at an annualized pace of 0.5%. Canada continues to be the United States’ biggest trading partner, accounting for nearly a fifth of all US exports.
The US trade deficit fell further in the month of August to $41.9 billion compared to $45.2 billion in July. The strong US dollar combined with slower manufacturing led to a fall in imports.
Investors are deploying more of a top-down approach. Valuations have improved on housing and auto sales data, consumer spending, and lower inflation. Slowing growth across major emerging markets and commodity-driven nations is leading to higher investments domestically as well as in the Eurozone.
Alternative asset managers such as Blackstone (BX), KKR (KKR), and The Carlyle Group (CG) are offering attractive alternative options to investors who want higher returns amid low interest rates.
Current valuations have priced in the outperformance of US equities against European (EFA) and Asian equities (EEM). However, with competitive quantitative easing due to slowdowns in China, Japan, and commodity-exporting nations such as Brazil and Russia, investors are looking for investments in safer assets. As a result, investments continue to support asset prices in the United States and Europe.
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