Industrials Sector Rating: Marketperform
Industrials sector overview
Global manufacturing has improved, while U.S. manufacturing remains in expansionary territory. However, disappointment with the lack of U.S. fiscal stimulus spending 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, especially, is showing signs of improvement. Some of the uncertainty regarding elections within the bloc has been resolved and PMI readings have improved, while the European Central Bank announced a plan to begin to reduce their asset purchases. However, China has tightened monetary policy by issuing restrictive new housing regulations according to Reuters and raising a key interest rate, while President Xi, during the recent politburo, neglected to mention a target growth rate—indicating growth at all costs is not the policy of China going forward (Wall Street Journal, October 26, 2017) .
In the U.S., the Institute for Supply Management's Manufacturing Index was quite strong in January, moving only slightly lower to 59.1 from 59.3 the month before, while the forward-looking new order component posted a robust 65.4 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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