Events overseas -- most notably in Greece and China (see below) -- may be starting to weigh on sentiment in the U.S. equity market on Wednesday, with the Dow Jones Industrial Average (INDEX: ^DJI) and the broader S&P 500 (INDEX: ^GSPC) down just 1.23% and 1.35%, respectively, at 12 p.m. EDT. The technology-heavy Nasdaq Composite was down 1.48%.
As Chinese authorities come up with creative new measures to try to prop up their equity market, mounting losses only highlight their impotence faced with a tide of panic selling. The numbers that characterize the savage rout in China's stock market are staggering:
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Between Tuesday and Wednesday, over half of all stocks listed on the two main exchanges were suspended, with an aggregate market value $2.6 trillion in stasis, according to Bloomberg data cited by the Financial Times.
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The mass suspension did not prevent another day of losses on Wednesday, with the main Shanghai and Shenzhen Composite Indexes now down 32% and 40%, respectively, from the highs they put in less than a month ago.
Have these declines created opportunity for investors? Goldman Sachs (GS +0.37%) appears to think so -- the investment bank is now forecasting the CSI 300 Index, which contains 300 stocks selected from the Shanghai and Shenzhen exchanges, will rise by more than a quarter over the next 12 months.
Putting aside the fact that predicting where share prices will be over a one-year horizon is a (small-f) fool's errand, I'm less sanguine. Bear in mind, for example, that despite a vertiginous drop, the CSI 300 is still up over 70% over the last 12 months, so it's not clear that all the froth has been wrung out of this market.
It's true that, on a valuation basis, the index does not look outrageously expensive at 14 times the next 12 months' earnings-per-share estimate, or a mere 14% premium to the MSCI Emerging Markets Index. (Although the premium is wider for a number of other forward indicators, including price-to-book, price-to-cash flow, and enterprise value-to-EBITA.) However, one has to wonder to what degree earnings-per-share estimates for Chinese companies will hold up as the economy slows.
Still, it is likely the current bear market will create opportunity in individual stocks for investors, if it has not already done so. Compare, for example, Twitter Inc (TWTR +0.00%) to its Chinese counterpart, Weibo Corp (ADR) (WB +1.03%) on a few basic, but important, operating and financial metrics:
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MAUs: Monthly active users (year-on-year growth) |
198 million (+38%) |
302 million (+18%) |
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Mobile MAUs as a % of total MAUs |
86% |
80% |
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Market Capitalization |
$2.7 billion |
$23.2 billion |
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EBITDA Margin |
+0.2% |
(23.6%) |
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Price-to-Earnings Ratio* |
33.7 |
69.8 |
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*Based on next 12 months' earnings-per-share estimates. Source: Bloomberg.
I happen to believe that Twitter remains overvalued today, so it's not necessarily an ideal benchmark. However, if I were a Twitter shareholder, the above table would cause me to ponder why I'm not swapping it out of my portfolio for Weibo (or simply adding the latter, perhaps).
