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:
Non-manufacturing still doing the heavy lifting in the US
US data continues to moderate ever so slightly but not to levels that warrant excessive concern in our minds. Only two of our 10 indicators now register a “Neutral” rating with the balance still rating “Positively”. We continue to believe this reflects a modest slowdown in the manufacturing sector. We believe the slowdown has its roots in the abrupt stop of petroleum activity over the past several months and the five-day port strike on the West Coast back in February. The impact of both of these events is likely still rippling through the economy. Nevertheless, the services sector reminds us that it is the principle driver of the US economy. The sector just reported rebounding conditions in April as the ISM non-manufacturing index rose from 56.5 in March to 57.8 in April keeping its uptrend intact.
“Grexit” not looking so scary anymore
Europe continues its rebound with our regional employment indicators showing ongoing job creation across the region (except for France notably). We also saw tax collections in Germany and the UK remaining strong last month as well as profit expectations for the region continuing to rise. Greece remains a risk for the region, but increasingly the market is relaxed with any outcome. Whereas previously an exit was seen as disastrous, ministers now openly hint at its possibility. The consensus view today is Europe is well positioned to take any fiscal hit from a Greek default. Moreover, Greece’s hardline attitude of continued fiscal impunity despite rapidly depleting, borrowed funds is garnering little sympathy in the region.
Rising risks to the downside in China
Our China indicators are largely either directionless or weakening. However, three indicators we track have heightened our risk assessment for the region. First, electricity usage for the February/March period was up only 0.9% versus the same period last year. This is well off the mid-single-digit growth it had held for some years. Admittedly the connection between electricity usage and economic growth has diminished over the past few years. China has pivoted its economy away from direct investment and manufacturing, so the slower growth rate is not as alarming as it seems. Second, tax collections for the February/March period were unchanged versus the same period last year breaking its longstanding trend of solid mid-single-digit growth. The absence of growth is more disturbing because it suggests China’s transition is leading to an economic contraction. Thirdly, and most alarming to us, is shipping rates between China and its main trading partners is plummeting. The Shanghai Shipping Exchange freight index has fallen nearly 17% since mid-February and is now at levels not seen since 2011. The glut in global shipping capacity is already well known in the market so the sharp fall in rates cannot be explained solely by overly zealous shipping executives. In the context of directionless manufacturing indicators, falling electricity usage, and shrinking profits falling shipping rates points to poor demand conditions. Said differently, there is too much supply because China is demanding less as its economy might be stalling. We still assess China as “Neutral” but see rising risks to the downside.
Japan’s “Positive” assessment still under pressure
Continuing off last month’s observation that economic conditions had decelerated in Japan, the same can be said this month. We maintain our “Positive” assessment and point to economic conditions that still slightly favour growth. On the one hand, profit expectations are rising as companies report better than expected financial results and export traffic is improving. On the other, both the manufacturing and services PMI is hovering around 50 suggesting trading conditions are neither expanding nor contracting.
Construction and gasoline still blunting the decline in resources
We maintain our “Neutral” assessment for Australia as our indicators remain directionless. At this time, the slowdown in the resources sectors continues to be blunted by rising residential and infrastructure construction activity and lower gasoline prices.
Media enquiries:
Nathan Lim CFA
Portfolio Manager
Australian Ethical Investment
(02) 8276 6271 0400 300 819
nlim@australianethical.com.au
www.australianethical.com.au