Australian Ethical observes indicators that track the production and movement of goods and services through an economy’s supply chain to gauge current trading conditions. Each month they update their proprietary model for the latest figures.
International Equities Portfolio Manager, Nathan Lim, provides this month’s update:
Despite port disruptions, the US keeps getting stronger
US traffic data finally showed a material impact from the West Coast port dispute. Before the actual four-day lockout, dock workers had only implemented slowdowns that did not have a discernible impact on traffic flow. We have considered the impact of the strike on our data and believe traffic conditions remain robust in the US. Labour conditions continue to improve with unemployment falling further. We note increasing anecdotal evidence that wage pressure is starting to show in the system with reports that retailers are pushing up wages well above the legal minimum which we see as a sign that competition for labour is increasing. This is promising given that one of the notable missing drivers in the US recovery to date has been real wage growth.
Europe still trending sideways, but the equity markets are expecting much more
Improving labour conditions and a sharply improved Eurozone Services Purchase Managers Index (PMI) are being offset by a flat Manufacturing PMI, poor air traffic growth and other directionless data. Whilst we retain our ‘Positive’ assessment for the region, we do not have high conviction. We note that the “European equity trade” has become quite fashionable at the moment ahead of the start of the European Central Bank’s quantitative easing programme on March 9. We highlight that the forward Price Earnings Ratio for the MSCI Europe index is at a record high (our records only go back 10 years) with expectations of around 30% profit growth. We are skeptical such a strong profit outcome will be achieved given the muted economic data we are tracking.
China is still coming in for a soft landing
China has announced its 2015 Gross Domestic Product (GDP) target of “around 7%”, its lowest in 11 years. This fits in with our view that the country is focusing its growth plans away from fixed investment and towards consumption, which will have the effect of slowing growth in the near to medium term but which should deliver a more sustainable longer term growth outcome. We can get a sense of their success so far with this strategy by observing the Services PMI reading: both the official and HSBC version have managed to remain in expansion territory throughout China’s ‘go-slower’ strategy thus far.
Japan’s industrial complex benefitting from weak Yen, domestic consumption not so much
We note that the export, industrial side of Japan seems to be responding to the weak Yen as we see continued strength in export air traffic, a steady Manufacturing PMI and strong tax receipts. Conversely, the Services PMI has remained range-bound that is likely a reflection of a broader softness in domestic consumption. Our strategy has been to focus on the industrial side of the Japanese economy which we continue to assess as being ‘Positive’.
Australia takes a worrisome turn
Australia’s economic data has taken a worrisome turn for the worst. Unemployment continues to climb, corporate profit expectations are declining, rail traffic growth turned negative, port traffic growth is moderating, and both the Services and Manufacturing PMI are in contraction territory. The ongoing deterioration in our economic indicators is eroding our ‘Neutral’ rating. The economic weakness we are observing might be gaining momentum.
Nathan Lim CFA
Portfolio Manager
Australian Ethical Investment
(02) 6201 1971
0400 300 819
nlim@australianethical.com.au