Tuesday, January 5, 2016

Don't blame the PMIs

It has been a weak start to the trading year especially for emerging market equities and currencies.  The catalyst appeared to be a decline in a China manufacturing PMI index. 

The Caixin China manufacturing PMI fell from 48.6 in November to 48.2 in December, following two consecutive months of improvement since the low of 47.2 in September.  While this is a disappointing result it is at odds with other indicators, notably the official manufacturing and non-manufacturing PMI’s, which both rose in December. 

Our view on China is unchanged.  We expect a continued modest economic slowdown with some sectors faring better than others as the economy continues to rebalance away from investment and manufacturing towards consumption and services.  

While the PMI may have been the catalyst for the weakness in the China market, other factors are at play including a further lowering of the Rmb and the upcoming expiry of the ban on sales of shares by large shareholders that was imposed during the market volatility late last year.

Looking at other emerging market PMI’s the fall in the India index to below 50 was the biggest disappointment, appearing to be, at least in part, due to poor weather.  The Russia index also fell back to below 50, most likely due to the latest bout of weakness in oil prices.  Mexico also dropped back a touch but remains at an overall healthy level with that economy continuing to benefit from above-trend growth in the United States.

On the upside indices in Turkey, Taiwan, Vietnam, Korea, Malaysia and Indonesia improved.  The Brazil index also rose but the low level of 45.6 continues to highlight the economic (and political) challenges there.

So still a very mixed picture across the emerging economy landscape, but one that is gradually improving, on average.  Capital Economics aggregate emerging market PMI inched higher from 49.2 to 49.3 over the month, its third consecutive increase.  So still under 50, but heading in the right direction.

This latest batch of PMI releases hasn’t changed our view on global growth of 3.4% this year, up from a likely 3.1% in 2015.  While we don’t buy the China hard-landing story, it does represent the most significant downside risk to our forecast.  That said, the Government still has plenty it can do to support growth should it be required.