Foreign Affairs

The Third Quarter proved difficult both on a relative and absolute basis. Emerging Markets took a terrible hit, including China and especially South Africa, where some of our long-term (and better performing) holdings reside.

SA took a hit in conjunction with slowdowns in their economy, political unrest, and particularly the difficult headwind of the further strengthening of an already strong US dollar. We had trimmed some of our holdings earlier in the year, but retained exposure. Data indicates, and we believe that, the brunt of the force has been dealt. But, there is likely near-term volatility ahead and will act cautiously before looking for bargains.

As we discussed last quarter, China has been disproportionately (and illogically) impacted by the trade and tariff imbroglio. While the S&P has reached all-time highs and is up roughly 11% for the year, China’s benchmark Shanghai Composite has plummeted 19%. This reaction is not indicated by the Chinese economy, which remains relatively strong with a GDP growth of 6.7%. It now trades at a great discount of 41% on a P/E basis, which is catnip to the value investing community.

As of the latest Chinese market data available at the end of July 2018, P/E valuation ratios vs. the US market are at historic lows, with the SSE trading at 14.3 times earnings (with earnings growing at 22% YoY), while the S&P trades at 24.3 times earnings (the 100-year average since January 1919 is 16.5), with earnings growing at 17.8%. Food for thought?