16 August 2020
Source: Bloomberg & Momentum Global Investment Management
What this chart shows
Unprecedented has been the one word we have probably read and heard the most this year. In so many ways it has been, and it certainly applies to PMI (purchasing manager indices) data too. As a reminder, PMIs serve as an indicator of business activity and market conditions, with 50 (yellow shading above) the point separating expansion (>50, green shading) and contraction (<50, red shading) compared to the previous month. Here we show PMIs through 2019 and 2020, highlighting values for each month of 2020 so far. We last provided an update after March numbers were released which despite turning lower, particularly in the services sector, only partially reflected the impact of lockdowns which only came into effect for most of the countries in this list in March. China first went into lockdown in late January and they saw an earlier deterioration and an earlier recovery. April was the first full month of lockdown for the US and Europe and the impact is clear: for example, the Spanish services PMI collapsed to 7.1 with most other countries not much higher. Since then we have continued to see a broad deterioration in activity (PMIs below 50). However, July marked a big improvement with the majority of countries releasing PMIs above 50, thus showing expansion from June.
Why this chart is relevant
The latest PMI data is encouraging and reflects a pickup in activity of late. Of course, second waves of coronavirus, spikes in fatalities and/or renewed lockdowns (as we have seen in localised pockets more recently) could turn these lower again. Some countries who remain troubled by ever rising cases, including India above, continue to show weak data. PMIs are a useful lead indicator for economic output and earnings. With equity valuations ranging from fair to a little full in some cases today the market is pricing in a recovery of earnings later this year and into next year and beyond. Whilst the latest PMIs are positive, falls from here would certainly question the speed of this recovery, imposing pressure on equities. Let’s hope for more green on this chart when we next provide an update.
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