50% Off! Beat the market in 2025 with InvestingProCLAIM SALE

In a Flash, China Looks Strong

Published 05/27/2014, 03:14 PM
Updated 07/09/2023, 06:31 AM
US500
-
GAZPq
-
STTL
-



If you want to know where the world economy is headed, there is one number that I believe investors should focus on: the HSBC China Manufacturing Purchasing Managers’ Index (PMI).

Last week, China's preliminary flash PMI for May came in at 49.7, beating Bloomberg’s consensus of 48.3.

When evaluating this number from one month to the next, it is common to focus on whether or not it has crossed above or below the 50 mark. A reading above 50 signifies expansion in manufacturing activity, while a reading below 50 signals contraction. This has certainly acted as a warning sign for how the economy will perform moving forward, but at U.S. Global Investors we look at this number a little differently.

Here’s how we see it:

When it comes to China’s PMI, it may surprise you that from November 2005 to December 2013, there have only been six instances when it crossed above 50. The infrequency of this “tell-tale move” is exactly why co-portfolio manager of our China Region Fund, Xian Liang, and I monitor the one-month versus three-month trend, in addition to keeping track of its 50-mark movements.

China Manufacturing Activity 2013-Present
Let me explain: When the current flash PMI number (49.7 for May) moves above the three-month moving average (48.6), our research shows that such a move is positive. Historically, since 2005, after the one-month crosses above the three-month average, there is a 61 to 72 percent probability that commodities and stocks will rise in the following one-month and three-month periods.

Looking back to the post-crisis period, after 2008, the probability for such movement has been lower, but still remains above 60 percent for the S&P 500 Index as well as copper.
PMI Trends

Life is about managing expectations, and as I wrote recently, the PMI is an excellent tool to use.  These numbers allow us to anticipate the direction of manufacturing activity and help to shape our investment decisions while simultaneously managing our emotions.

A case in point for China’s numbers

From November 2005 to December 2013, there were 18 occurrences when China’s PMI saw one-month cross above three-months. Below are a number of these instances.
Commodities and Commodity Stocks After PMI Cross-Over
Of course, investors should keep in mind that these are examples of possible ramifications – past performance does not guarantee future results.

China’s flash PMI for May represents not only the highest reading in five months, but also the largest single-month jump since August 2013. This bodes well for industrial production as we move forward, one more encouraging sign for investors to watch, and shows the potential for an exciting second half in 2014 for the energy market and commodity demand.

Government policy is a precursor to change

Another headline for China last week is the country’s 30-year gas deal with Russia. Vladimir Putin, Russia’s president, signed a multi-billion dollar deal between Gazprom (MCX:GAZP) and China National Petroleum Corp. How is this significant for the global economy?

To start, this deal connects two of the world’s superpowers and allows Russia to expand its gas market to Asia. It’s noteworthy for steel and pipelining as well. Steel demand should grow dramatically along with pipeline production, and this will call for more engineering jobs in China.

Looking forward

These significant developments out of China, whether in the form of flash PMI or a gas deal with Russia that could boost steel demand, are bullish signs to keep this country on your radar. Look for the opportunity, know what is happening in the global market, and be curious to capitalize on what you find.

Disclaimer: Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Past performance does not guarantee future results.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 3/31/14: China National Petroleum Corp. 0.00%, Gazprom OAO 0.00%, Pacific Rubiales Energy Corp. 0.00%, Silver Wheaton Corp. 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.  The S&P 1500 Energy Index is an unmanaged market capitalization index that tracks the companies in the energy sector as a subset of the S&P 1500. The S&P 1500 Materials Index is an unmanaged market capitalization index that tracks the companies in the material sector as a subset of the S&P 1500. The HSBC Flash China Manufacturing PMI is published a week ahead of the final HSBC China PMI every month. It analyzes 85-90 percent of the responses to the Final PMI from purchasing executives in more than 400 small, medium and large manufacturers, both state-owned and private enterprises. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.