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:
The US is still expanding
US rail traffic has taken a noticeable downturn because of lower coal volumes and traffic tied to shale oil & gas development. We suspect this is symptomatic of the weak economic activity we have been observing. The collapse in the oil price last year arrested oil & gas development that previously was having a sizeable, positive impact on the economy. An impact likely larger than most had calculated. As a second derivative impact of all that previous drilling, the abundance of natural gas has again pushed down prices to the point where power stations are switching to natural gas from coal to make electricity. The loss of coal volumes should naturally weigh against this portion of the mining sector as well. That said, we continue to see steady US expansion but perhaps at a slightly slower rate.
Is the EU recovery finally extending past Germany and the UK?
Europe’s recovery remains muted; however, the expansion in the May Europe-wide Purchasing Manager Index (PMI) despite a fall in the Germany PMI signals to us a widening in the recovery effort. To date, we believe it has largely been Germany and the UK driving growth, but perhaps this is changing. A sign of broader strength in the region is that the total number of people employed in Spain reached a new multi-year high. We continue to assess employment conditions in the region positively which is a strong basis for continued expansion.
On alert for a downgrade to China …
Our China indicators continue to deteriorate. We lowered our assessment on Fixed Asset Investment and Shipping Traffic to ‘Negative’ which has our overall indicator nearing contraction levels. Last month we highlighted that shipping rates were falling at an alarming rate suggesting economic activity was stalling. Rates continued their decline in May, which has us on alert for a downgrade to our China assessment.
… same goes for Japan
Export air traffic is flat-lining, the total number of employed persons is falling and the Manufacturing PMI is directionless. We suspect our next move on Japan is to downgrade our assessment.
Australia still hanging in there
We remain ‘Neutral’ on Australia because our indicators remain range bound. This is consistent with the reported GDP figures that show the economy continues to decelerate. The weak dollar is supporting exports while residential and infrastructure construction activity can be said to be blunting the impact of the loss of investment in the resource sector.
Media enquiries
Nathan Lim CFA
Portfolio Manager
Australian Ethical Investment
(02) 8276 6271 0400 300 819
nlim@australianethical.com.au
www.australianethical.com.au