Not necessarily out of the woods yet

05 December 2019

5 minute read

It is fair to say that the last two years have not been good ones for manufacturing activity. The step back from globalisation, be it with the use of tariffs by President Donald Trump or continuous paralysis from Brexit uncertainty, has impeded business investment and in turn manufacturing output.

However, investors have become more optimistic that the worst may be behind us as leading economic indicators exhibited a “V-shape”, signalling a trough and subsequent recovery.

Global rebound?

Despite trade tensions remaining elevated, China’s November official manufacturing purchasing managers’ index (PMI) surged to 50.2. This marked the first time the index suggested economic growth, or when it is above the 50.0 mark, since April. Indeed, the US IHS Markit PMI went further into expansion territory, with the strongest expansion in factor activity in seven months. Furthermore, the eurozone PMIs declined by the slowest rate in three months, primarily a result of Germany rising two points, albeit from depressingly low levels.

On the other hand, it is worth putting this “rosy” picture into perspective. Eurozone manufacturing still remains notably in contraction territory. The same applies for the UK, where not only was the reading below 50, but firms laid off workers at the fastest pace in seven years, suggesting that the worst may not be fully over.

Also, the Institute for Supply Management manufacturing index in the US painted a completely different picture than that of the IHS Markit PMI, as it remained in contractionary territory and 1.1 points lower than the market consensus.

Recovery seems overly optimistic

A shifting global order

Whether manufacturing has seen the end of a tumultuous time is hanging in the balance. Even if we take forward-looking indicators that point to recovery as given, President Trump will likely continue to use tariffs as his weapon of choice. Indeed, new tariffs were implemented on Brazil and Argentina, as well as tariff threats on French champagne, handbags and cheese, in the first week of December.

Also, it’s worth remembering his statement on 3 December suggesting a trade deal with China could happen after the 2020 US election, as opposed to before 15 December when further tariffs on China are scheduled to occur.

As we discuss in the Outlook 2020, in our opinion next year will be crucial to the shape that the emergence of globalisation 2.0 takes: will we see an increase in the move away from globalisation or a peak in protectionist measures, or a reversion back to a more integrated global order?

Erring on the side of caution favourable

For the time being, the direction of travel for the global order is very ambiguous, making tactical opportunities leveraging changes to it unattractive. Erring on the side of caution and focusing on areas which have strong fundamentals to perform in either scenario are favourable.

We see this with sectors and companies exposed to global consumption, such as consumer discretionary and communication services. These businesses are aided by healthy fundamentals (particularly in the US), the consumer being unaffected for long from faltering economic activity and the growth in the middle class in emerging markets.

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