Asian shares sold off hard here on Wednesday, with the latest numbers indicating that manufacturing, normally such a powerhouse for Asia's exporters, is struggling around the region.
For China, Japan, South Korea, Malaysia, Taiwan and Vietnam, the factory output numbers for July flagged, according to surveys released today. Only in India, Indonesia and the Philippines is factory production on the rise. The dreary readings in Asia come as two surveys released on Tuesday confirm a recession is afflicting the U.S. manufacturing sector.
I'd indicated in mid-July that U.S. investors should look to India and Indonesia for emerging-market exposure, particularly if they are looking to cut exposure to China. These numbers certainly back that up.
The Caixin/S&P General Manufacturing Purchasing Managers' Index (PMI) dipped to 49.2 for July, according to the latest reading, the first contraction in three months. Anything below 50 represents a contraction in activity, and July's reading fell below that mark from 50.5 in June. It also missed the mark for economists, who had been anticipating a reading of 50.3.
New orders dropped after rising the prior two months, while overseas sales also fell by the most since September 2022. Employment levels also were down for the fifth straight month of decline.
Likewise, factory activity fell in Japan, and by a similar margin. The au Jibun Bank Japan PMI shows a reading of 49.6 in July, slightly worse than the 49.8 for June. The downturn reflects how manufacturers are adjusting output levels in the face of weaker demand. The sub-50 reading marks six months out of seven this year that have seen a decline in output.
New orders show a sustained contraction in Japan and a pace of decline that is picking up. Japanese manufacturers say both domestic and overseas demand is lackluster. Factories therefore reduced input orders, and there are signs they already are stockpiling goods. "Holdings of both pre- and post-production inventories rose in July amid reports that subdued conditions often left inputs unused and finished items unsold," wrote S&P Global, which compiles the survey for au Jibun Bank.
On the positive side...
There are some positives, however, notably that inflation pressures are easing, particularly for fuel and other commodities. The aftereffects of Covid-19 have also almost entirely dissipated. Manufacturers are also "optimistic that muted demand and production conditions would lift over the course of the coming year," S&P Global notes. Positive sentiment was therefore the second-highest it has been in the last 18 months, hinting that conditions may change over the course of the rest of 2023 in Japan.
Asia's chipmaking giants South Korea and Taiwan are also facing a challenging manufacturing picture. The S&P Global South Korea Manufacturing PMI came in at 49.4, although conditions are improving as it seems the glut for memory chips is coming to an end. The July reading was significantly better than the 47.8 reading in June and was the highest for a year. However, new orders now have declined for 13 months in a row.
Unlike China, the employment picture is improving in Korea, suggesting that the country's manufacturers are gearing up to increase capacity based on a stabilization in chip demand.
Raw material prices are falling, which is leading to a reduction in both input and output charges in South Korea. Companies are therefore able to reduce prices. Buying activity rose for the first time in a year, another sign that conditions in Korea look set to turn.
Taiwan in a funk
Taiwan's manufacturers are currently suffering more than in any other nation in Asia, with the S&P Global Taiwan Manufacturing PMI falling to 44.1 in July from 44.8 the month before. It means manufacturing output has declined for 14 months in a row, with sentiment at its worst reading since January.
Taiwanese factories are scaling back purchasing activity, cutting jobs and seeing declines in exports. You'd expect Taiwan's output picture to follow that of South Korea, but for now the only positive out of Taipei is that input costs are down sharply, though so too are the prices that manufacturers can charge.
The dismal readings for most of Asia contrast sharply with the picture in Indonesia, where manufacturing output has hit a 10-month high, the 53.3 reading for July marking the 23th straight month of expansion in factory activity.
In India, the 57.7 reading in July marks the 25th straight month of growth in factory activity. While the increase is the lowest in three months, that's a strong track record. Only the Philippines, with a 51.9 reading in July, is also seeing its factories hum a little louder.
The generally poor production readings in Asia, coupled with the U.S. manufacturing recession and a sovereign credit ratings downgrade of U.S. government debt by Fitch Ratings, were enough to drive stocks lower on Wednesday almost across the board.
In Tokyo, the broad-market Topix fell 1.5%, while the blue-chip Nikkei 225 dropped a hefty 2.3%. Hong Kong's Hang Seng Index posted the worst reading in Asia, down 2.4% today.
In South Korea, the Kospi was down 1.9%, mimicking the 1.9% fall in the Taiex in Taiwan.
For today, Indian and Indonesian stocks also fell, with the Nifty 50 down 1.2% in Mumbai and the Jakarta Composite off 0.5%. But U.S. investors would be best advised to look to ETFs tracking those markets for prospects in 2023 and 2024.