News over the last few days suggest that amid the Greek debt crisis, a potentially more important China crisis has emerged. Looking at the following chart, one can see a nearly identical downward move of German and Chinese (Hong Kong) stock markets.
This week, both markets exhibited their lowest level for 2015, so far. With -15% and -17%, the drawdowns from each market’s peak are all but equal. It is interesting to notice that both peaks were reached in April. Since then, the Hong Kong stocks have not been in an upward trend anymore.
Does Greece influence the equity market behavior in Europe, or is China the main driver behind it? Is there a China crisis at all, beside the fact that speculation from private investors sharply increased stock prices on the domestic exchanges? How important is the currently very cautious US investor, whose allocation shows high cash and hedging ratios (and invests in currency-hedged vehicles)?
A price-expected earnings-ratio close to the single digit region is certainly not an indication for an overvalued market. A stock market bubble cannot be identified on these valuation levels. Nonetheless, cheap valuations can always get cheaper, see 2008.
Our Global Equity strategy selected China/Hong Kong to replace Mexico within the Emerging Market rotation, at the end of last month.