Manufacturing sector downturn extends into 2016
The Caixin China Manufacturing PMI (or purchasing managers’ index) came in at 48.4 in January, slightly up from 48.2 in December as manufacturing units signalled a modest deterioration in operating conditions at the start of 2016 with both output and employment declining at slightly faster rates than in December.
However, the reading is still below the 50 mark, which indicates the manufacturing sector is contracting. The Caixin Manufacturing PMI focuses more on small-to-medium-sized private firms, which are adversely impacted by the economic slowdown and high financing costs. Despite a faster decline in new export work, total new business fell at the weakest rate in seven months.
Overall new orders decline
Both export and domestic new orders fell due to relatively weak demand, which led to firms cutting production. Lower workload resulted in reduced purchasing activity and lower labor force requirement with an increase in job cuts. Meanwhile, the backlog of work rose at manufacturing companies, albeit slowly, while the level of inventories of finished goods fell for the second month in a row.
Input and output costs
The average cost continued to decline in January amid lower input costs for a broad range of raw materials due to the deflationary environment. In order to boost demand, sellers gave heavy discounts to consumers, and lower selling prices were supported by a further fall in average input costs in 2016. As a result, output cost also declined as manufacturers passed their savings to clients due to increased competition for new work orders.
Impact on mutual funds
The Oberweis China Opportunities Fund (OBCHX) has the largest exposure of 20.4% to the industrials sector among the six mutual funds shown in the above graph. The other three funds, the AllianzGI China Equity Fund – Class A (ALQAX), the Matthews China Fund – Investor Class (MCHFX), and the Fidelity Advisor China Region Fund – Class A (FHKAX), have more than 10% exposure each to the industrials sector. So with the current slump in the manufacturing sector, these funds will be highly impacted. On the other hand, Templeton China World Fund – Class A (TCWAX) and the Eaton Vance Greater China Growth Fund (EVCGX) have less than 10% exposure to the industrial sector and thus would be less impacted by the manufacturing slowdown.
With the slowdown in factory output, companies such as Taiwan Semiconductor Manufacturing (TSM), China Mobile, CNOOC (CEO), and Tencent Holdings (TCEHY) may face pressure to sustain their revenues and margins. Since the above mutual funds are invested in these companies, they will be adversely impacted.
In the next article, we’ll analyze China’s services and composite PMIs and their impact on the mutual funds.