Daily Brief: Manufacturing Activity Drops Off In China, Which Isn’t Exactly What Investors Want To Hear

Daily Brief: Manufacturing Activity Drops Off In China, Which Isn’t Exactly What Investors Want To Hear

over 2 years ago3 mins

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Here’s a new wrinkle in China’s once smooth recovery: data out on Wednesday showed China’s manufacturing activity shrank in August for the first time since April 2020.

What does this mean?

It looks like China’s economy is finally losing steam after having outperformed its rivals’ during the pandemic: a widely followed manufacturing activity survey – which asks factory managers how busy they’ve been compared to the month before – showed activity in Chinese factories shrank for the first time since the early stages of the pandemic. And it’s not the country’s first sign of trouble: China’s also contending with weaker export demand, soaring prices for raw materials, and a slowing property sector – all of which are hampering economic activity.

Caixin PMI
Source: SCMP

Why should I care?

For markets: Chinese stocks are losing fans.

Several investment banks have recently cut their growth forecasts for China, and Wednesday’s data could bring about even more downgrades. That’s not good news for Chinese stocks, which are already under pressure from the government’s ever-intensifying crackdown on the country’s fastest-growing industries. Just look at the popular index made up of the biggest 300 Chinese stocks: it’s down by 7% so far this year, even as US and European stock markets flirt with all-time highs.

CSI 300
Source: Google Finance

Zooming out: Watch your emissions.

China might be slowing down, but manufacturing activity in the eurozone is booming at near-record rates. Trouble is, the region’s factories are some of the biggest emitters of carbon dioxide, alongside fossil fuel power plants and the transport industry. The European Union is trying to do something about that, with a “cap and trade” system in place to limit emissions in polluting industries. But companies can still exceed their cap by buying “allowances” from the EU’s carbon market, and boy have they been doing that: the price of carbon allowances hit a record high this week.

China emissions

Keep reading for our next story...

The UK’s Major Stock Market Index Will Reshuffle This Week

FTSE image

The FTSE 100 is undergoing its quarterly reshuffle this week, and the injection of a few big names could give Britain’s biggest index a new lease of life.

What does this mean?

The FTSE 100 comprises the UK’s biggest public companies by value, and its performance helps investors gauge the health of both corporate Britain and the wider economy. But since company fortunes can turn on a dime, the FTSE is regularly updated to reflect stocks whose total market values have risen and boot out those whose values have dropped.

Both supermarket chain Morrisons and aerospace component-maker Meggitt are expected to join the party, having seen their stocks shoot up after takeover news. Dechra Pharmaceuticals too: the veterinary drug company’s shares are up more than 50% this year – a true testament to the lockdown pup-splosion. They’ll be taking spots from broadcasting giant ITV and engineering group Weir – both of which underperformed the FTSE 100 by nearly 10% last quarter – along with Just Eat Takeaway.com. That’s not because of its value, mind you: the FTSE just ruled that the food delivery platform is Dutch rather than British.

Tech shrinking

Why should I care?

The bigger picture: So much for a “new economy”.

Tech firms already represent a much smaller proportion of the FTSE 100 than they do of the equivalent American and German indexes, and Just Eat Takeaway.com’s elimination will only make matters worse. But at least the FTSE isn’t short on healthcare: the sector is already the index’s biggest, and it’s set to get bigger when Dechra joins the squad.

For markets: Keep an eye on funds.

Billions of dollars are invested in funds that passively track the FTSE 100, which means those funds are forced to invest in any stock new to the index. That's why some keen-eyed investors might’ve bought into certain high-performing UK companies ahead of this week’s rebalancing, hoping they’d profit once the passive funds buy up their stocks to reflect the updated index.

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