uploads///Mutual Funds Exposure to the Industrials Sector

Caixin China Manufacturing PMI Deteriorated Further in December

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Jan. 11 2016, Published 10:29 a.m. ET

Manufacturing output shrank further in December

Staying below the neutral reading of 50, the Caixin China manufacturing PMI (purchasing managers’ index) came in at 48.2 in December, down from 48.6 in November. This signaled that business conditions worsened in December.

A reading below 50 indicates that manufacturing activity is contracting while a reading above 50 indicates expansion. The Caixin manufacturing PMI focuses more on small-to-medium-sized private firms that are adversely impacted by the economic slowdown and high costs of financing.

Dr. He Fan, chief economist at Caixin Insight Group, noted, “The forces driving economic recovery have encountered obstacles, and the economy is facing a greater risk of weakening.”

Manufacturers saw further deterioration in operating conditions in December 2015. Overall, new business declined mainly due to weak domestic and foreign demand. New business was down due to a decline in new export orders.

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Overall new orders declined

The relatively weak market conditions and reduced client demand forced firms to cut output. The soft demand from the domestic and international markets created a drag on the overall business. Further, new export orders fell in December after rising consecutively for the previous three months.

A lower workload resulted in reduced purchasing activity, lower stock of inputs, and lower labor force requirement. Fewer sales led to some accumulation of finished goods.

Input and output costs

The average cost declined further in December amid lower input cost for a broad range of raw materials with metals in particular due to a deflationary environment. In order to boost demand, sellers gave heavy discounts to consumers.

As a result, output cost also declined as manufacturers passed their savings to clients in the form of lower selling prices while some manufacturers claimed that increased competition for new work orders led them to slash their selling price.

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Impact on mutual funds

The AllianzGI China Equity Fund – Class A (ALQAX) has the largest exposure of ~20% to the industrials sector among the four mutual funds in this review. The other three funds—the US Global Investors China Region Fund – Investor Class (USCOX), the Shelton Greater China Fund (SGCFX), and the Guinness Atkinson China and Hong Kong Fund (ICHKX)—have exposure ranging from 11%–14% each to the industrials sector.

With the decline in factory output, companies such as Taiwan Semiconductor Manufacturing (TSM), China Mobile Ltd (CHL), CNOOC Ltd (CEO), and Tencent Holdings (TCEHY) are facing pressure to sustain their margins. Because the aforementioned mutual funds are invested in these companies, they would be adversely impacted.

In the next article, we will analyze China’s services and composite PMIs and their impact on mutual funds.

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