A Renewed Focus on Fundamentals

07/20/2015 | David Joy

China's desire to be seen as a world economic power has been dealt a series of setbacks recently, largely of its own doing. The first setback occurred on June 9, when the MSCI global index declined to include China's domestically listed shares in its emerging markets indices to the surprise of many, including Chinese authorities who thought they had done enough to satisfy MSCI's criteria. In making its decision, MSCI pointed to investor concerns over the quota system by which institutional access to the market is determined, limited capital mobility and share ownership legal issues.

The second setback came in reaction to the government's response to the plunge in domestic share values that began on June 13, no doubt precipitated in part by the MSCI decision. In an effort to stop the slide in share prices the government intervened with a series of measures that have met with at least temporary success, but which likely comes at the expense of investor confidence longer-term.

And a third event that raised eyebrows in some quarters came last week when the Chinese government reported a 7.0 percent year-over-year growth in gross domestic product in the second quarter. Skeptics point to higher frequency data that would suggest a significantly slower rate of growth than officially reported, including slumping electricity usage, retail sales, business confidence and rising inventories.

Investors Struggle to Find True Market Value in China

The cumulative weight of these events demonstrates China's ambivalence toward market-based economic forces, or more accurately, market-based outcomes. For a country that seems to desperately want to be viewed as a world economic power, it struggles to overcome its central planning tendencies.

For investors, these tendencies make true price discovery difficult, if not impossible. MSCI will likely include domestic equity shares in its emerging market indices in time. The International Monetary Fund (IMF) will likely include the yuan in its special drawing rights basket in time. But until China acquires a greater respect for the wisdom of free markets, investors must tread very carefully.

U.S. Markets Rebound and Earnings Take Center Stage

In the U.S. last week, the S&P 500 rose 2.4 percent for its best weekly advance since March. The economic data was mixed, with housing starts and permits strong, core consumer inflation firm, but consumer sentiment and retail sales soft. The Nasdaq Composite hit a new all-time high on Friday after Google shares surged following its earnings release.

Second quarter earnings season will ramp up sharply this week, after the banks were front and center last week. Expectations are subdued, setting up the likelihood of another quarter of exceeded expectations. Contributing to the better tone last week was ongoing progress on the Greek bailout, including interim financing and an expansion of bank liquidity, which enabled the banks to reopen and settled lingering fears of a Eurozone exit. Stocks in the Eurozone rose 4.0 percent on the week, their best performance since January. The euro slumped and the dollar firmed on the news out of Europe, as commodities remained under pressure.

With Greece receding as a concern, at least for now, earnings will be the primary focus in the days ahead. But not far from mind is speculation that the Fed may be inclined to raise rates at its September meeting, making the upcoming round of economic data increasingly influential. For investors, a renewed focus on the fundamentals may come as a welcome change.

Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

Morgan Stanley Capital International EAFE Index (MSCI EAFE), an unmanaged index, is compiled from a composite of securities markets of Europe, Australasia and the Far East.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Services, Inc. Member FINRA and SIPC.



distributed by