Global manufacturing was sent into free fall in 2019 as trade tensions between the US and China delayed investment. The G6 manufacturing purchasing manager index (PMI) plummeted from 60, the highest since the early 2000's, to 48 near the end of the year (Figure 1).

In this instalment of our five-part Investment Strategy Guide preview, we outline why we think manufacturing will rebound back to growth and be the key driver of corporate earnings growth.

We expect an inflection in the downwards trend of global growth rates, with a modest recovery in 2020 but still remaining below 2018 levels. This view is based on three factors.

First, heading into an election year we believe there are appropriate incentives for both China and the US to avoid any further mutual harm from trade ructions.

Second, a status quo in trade talks should see a recovery in manufacturing PMI to levels above 50. The improved trading conditions should be led by capital goods, cars and semiconductors – the areas most impacted in the past year. To a lesser extent, we can also expect a lift in interest rate-sensitive sectors from more accommodative monetary policy.

Third, policy settings should be supportive of improved growth with an increase in fiscal stimulus from Europe and China. Figure 2 indicates that there has been an increase in social financing (credit impulse) in China in the second half of 2019. This has historically been closely correlated with global PMI outside the US.

The US Fed’s deft transition from monetary tightening in late 2018, to loosening in 2019 has led to a dramatic easing in monetary policy that should work through the global economy in the coming year.

The recent coronavirus issue is certainly a negative to world growth and may drag on confidence and indirectly manufacturing. This will need to be monitored, but if contained will have negligible impact on manufacturing.

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.

For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.