Toughing it Out

Global economy

Toughing it Out

July data points to a picture that is probably not as bad as headlines suggest.


My first boss in this business told me that two things drive share prices: operational results and market perception. ‘Don’t listen to the noise’, he said. In the years since I’ve had grounds to argue, but these days it seems that perception is the driving force. Unfortunately, it now appears to be driven by ‘tweets’. The key concern for investors is just how affected is the Chinese economy and will it bail out the world again, just like it did in 2012 and in 2016?

The latest data indicates a picture that is more nuanced than headlines suggest. It appears that China is not imploding and investors are having trouble cutting through the noise.

One way to answer that is to try to determine what really is the state of play, economically speaking. Let’s look at the data on Purchasing Managers’ Index (PMI). This is an old favourite, summarising whether market conditions are expanding or contracting, from the viewpoint of purchasing managers. We now have July data, which points to a picture that is probably not as bad as headlines suggest.

Considering the tariff and non-tariff measures being deployed principally by the U.S. and China, but also by other countries, investors might reasonably expect to see as sea of red ink. In fact, Chinese manufacturing is ticking upwards, driven by strong year on year export numbers. Exports to the U.S. continued to fall, but they were more than compensated for by exports to Emerging Market countries. Elsewhere, positive manufacturing PMIs in India, Philippines and Vietnam were joined by Australia, whilst Europe weakened further, and the U.S. held steady. The more forward-looking part of these surveys is on new export orders and here, the picture is quite different: Southeast Asian countries in the ASEAN trade grouping, along with Australia, Vietnam and India are in clearly positive territory. China is ticking upwards again, as is Japan.

The troubled outlook is concentrated in the US, Europe and Korea, all of which are indicating a marked deterioration ahead. These are only a handful of monthly numbers, but the signs are clear: West is troubled, East is stable and there are plenty of (emerging) countries with economic growth and growing middle income populations who will increase their trade over the next decade.

Judging by the valuations out there, investors do not appear to be fully factoring in the fundamentals. This is understandable, because it’s hard to avoid getting wrapped up in the noise and that clouds our vision. If it feels like we are bumping along an old goat track without suspension sometimes, it’s probably because we are. Maybe time to reset expectations?


Definitions:

Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction.

The Association of Southeast Asian Nations (ASEAN) is a regional intergovernmental organization comprising ten countries in Southeast Asia, which promotes intergovernmental cooperation and facilitates economic, political, security, military, educational, and sociocultural integration among its members and other countries in Asia.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

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