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:
“It’s services, stupid”
The only US indicator we track that is showing any sign of weakness is the Manufacturing Purchasing Manager’s Index (PMI). Since peaking in October 2014, the indicator has slid continuously each month to the current reading of 51.5, suggesting that manufacturing in the US is nearing stalling conditions. Some of this might represent the abrupt slowdown in oil and gas drilling activity caused by the sudden fall in the oil price which would be unfortunate but not fatal to the recovery. Jobs and cargo traffic growth remains robust, and the Services PMI remains well into expansion territory. Recall the US economy remains largely driven by the services industry, so weakness in manufacturing thus far looks manageable.
Europe has hit its bottom and looks to be turning for the better
While previously Europe was seen as the economically strong north and feeble south, it now looks like everyone got invited to the recovery party (except for France and Greece). Second only to Germany, France still represents about 15% of Europe’s Gross Domestic Product (GDP) so its economic pains will impact its neighbours. We believe this largely explains the uneven sentiment across the region and muted recovery to date. Alternatively, at about 1.5% of GDP, Greece is not a major economic contributor. The European economy, however, will be impacted from the fallout from Greece exiting the Euro if it happens. Looking at our indicators, the Manufacturing PMI for Europe has abruptly arrested its steady decline through 2014 and has clearly hit its bottom for 2015. We note that tax receipts in the UK and Germany continue to strengthen and employment conditions remain good. Overall, we are regaining our confidence in Europe after some months of doubt about whether they would be able to avoid stalling.
Chinese New Year impacts China reading
Our indicators were impacted by the timing of Chinese New Year as it occurred in February this year versus January in 2014. This made it hard to get a good read on our indicators. We did note that the government seems to be applying targeted stimulus again to help the economy achieve its soft landing. This is consistent with its approach to date and warrants our continued “Neutral” assessment.
Has Japan lost its mojo?
The Manufacturing PMI seems to have lost its momentum threatening our “positive” assessment for the country. While employment conditions remain good and cargo traffic improved, we note that the Service PMI is already in contraction. If manufacturing starts to stall; the economic momentum for the country will look to stall as well.
Are more apartments and lower gasoline price enough to carry Australia?
We noted last month that the indicators we track suggested Australia had taken a worrisome turn. Interestingly, shipping container traffic has since risen sharply but the timing of Chinese New Year might have impacted the data. Our other indicators remained subdued with the unemployment rate making an unremarkable improvement from 6.4% to 6.3%. The increased construction activity and lower gasoline prices have so far blunted the slowdown in the resources sector but will it be enough? At this time, we maintain our “Neutral” assessment.
Nathan Lim CFA
Portfolio Manager
Australian Ethical Investment
(02) 8276 6271
0400 300 819
nlim@australianethical.com.au