Industrials sector overview
Global manufacturing has improved, while U.S. manufacturing remains in expansionary territory. However, concerns about a trade war could put a damper on the group, although the tax cuts should help to dampen that potential disappointment.
Market outlook for the industrials sector
Global manufacturing is showing increasing signs of life, with recent Purchasing Managers’ Index readings in most major countries moving into territory depicting expansion. Europe has slipped modestly but remains in positive territory. Some of the uncertainty regarding elections within the bloc has been resolved and PMI readings have remained in territory depicting expansion, while the European Central Bank announced a plan to begin to reduce their asset purchases. However, trade issues have flared up concerns about a trade war that could threaten the profitability of this very globally oriented sector. With President Trump’s softening of the initial steel and aluminum rhetoric, and reports that China and the U.S. are negotiating, markets breathed a sigh of relief, but it is still something to watch.
In the U.S., the Institute for Supply Management's Manufacturing Index remained quite strong in its April release, coming in at a solid 59.3, while the forward-looking new order component posted a robust 61.9 reading. Anything above 50 means an expansion in manufacturing activity. However, there were hopes at the beginning of last year that fiscal stimulus would be forthcoming and those hopes appear to be diminishing with the rancor in Washington, which has the potential to be a temporary weight on the group. But Strategas Research is reporting that defense spending has already ramped up at the fastest pace since 2011, while the recent escalation in geopolitical tensions could facilitate even greater military spending, both here and abroad.
Overall, we have concerns but they're somewhat balanced out, which results in our relatively neutral view.
Factors that may affect the industrials sector
Positive factors for the industrials sector include:
- Potential productivity gains: Corporate balance sheets remain relatively cash-rich, which should help push management teams to invest in new, more-efficient equipment to help offset weaker productivity.
- Room for growth: Relatively low manufacturing inventories signal the possibility of a demand-inspired rebuilding phase.
- Accommodative monetary policy: Excluding the Federal Reserve, central banks throughout much of the developed world are maintaining accommodative policies aimed at stimulating economic activity. Additionally, on the fiscal side, countries are considering undoing some of their more stringent austerity-related policies, which could help to boost economic activity and demand for industrial goods.
Negative factors for industrials include:
- Fiscal austerity: We continue to watch fiscal austerity measures around the world, which could dampen growth in the industrials sector. For now countries seem to be moving to scale them back.
- More aggressive Fed action: Should inflation start to reach concerning levels, the central bank could raise rates more aggressively, which would likely dent industrial shares.
Clients can see our top-rated stocks in the industrials sector.
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