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Despite positive PMI issues remain in Vietnam’s manufacturing

Vietnam's Gross Manufacturing Margins Indicators 2013-05-30Enlarge GraphHSBC released their April PMI report for Vietnamese manufacturing on May 1st 2013. While the report showed some positive signs for overall PMI and stronger operations measures than in the past, the financial sub-indices within PMI are not as promising.

In previous articles it has been mentioned that margin compression has been a looming issue within the Vietnamese manufacturing sector. This occurs when costs to make the product rise while simultaneously the products are sold for the same or a lower price. If the volume of sales does not rise to compensate the manufacturer receives lower margins.

Over the last two months manufacturers saw output prices rise for the first time since April 2012. However, this month they returned to negative territory at a value of approximately 48. Input prices had continued to rise during this time and over the last two years with about four outliers. This is bad news for manufacturers who continue to be at risk for more margin compression. While Output Index, New Orders Index and New Export index showed positive values at 51.8, 51.8 and 50.2 respectively the numbers are too small to compensate.

Vietnam's PMI Manufacturing Volume Indicators 2013-05-30Enlarge Graph

For investors this should be a concerning trend. While the manufacturing sector is exhibiting positive trends, failing to make a profit will drag the sector down over the long term and hurt investments in the medium term. It does not benefit investors if factories remain running and making enough profit just to support themselves; they need excess cash and capital to expand and produce wealth. This particularly applies to investors directly in Vietnam through Market Vectors Vietnam (VNM) and iShares All Asia ex Japan ETF (AAXJ), as Vietnam has been one of the brightest spots amongst recent emerging market turmoil.