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Global Manufacturing in a Tight Spot: ETFs to Watch

Sanghamitra Saha
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Trade war tensions seem to have started to have a negative bearing on the global manufacturing sector. The United States and China first targeted $50 billion worth of goods for import tariffs, out of which duties were imposed on $34-billion goods on Jul 6. Now, the Trump administration looks to raise tariffs from 10% to 20% on another $200-billion worth of Chinese goods.

Then, tariffs were imposed on metal imports from several other countries by the United States. There is fear of retaliation against America. Tariffs lead to rising commodity prices. So, companies seem highly concerned about Trump's aggressive trade policies.

There has been uncertainty regarding plans to relocate production to other countries to dodge retaliatory tariffs. Such confusions and slowdown in several developed economies started wreaking havoc on new export orders and output growth.

Slowdown in the United States

ISM purchasing manufacture ring PMI index dropped to 58.1 in July from 60.2 in June, lagging market expectations of 59.5. Data was the weakest in three months due to a slowdown in new orders, export orders and production, per tradingeconomics.

Though there was no slack in demand, the ongoing issues related to tariff imposition by the United States raised concern. Still, as many as 17 of 18 industries recorded growth in July in the United States (read: U.S. Manufacturing in the Pink: How Long Will ETFs Gain?).

Chinese Manufacturing at 8-Month Low

Factory activity in China slowed as well. The manufacturing sector expanded the slowest in eight months in July as export orders took a hit. The Caixin/Markit Manufacturing PMI came in at 50.8 for July, down from June’s 51.0. The data matched economists’ estimates.

New export orders displayed a substantial shrinkage at 48.4 — the fourth successive month of contraction in orders and “the worst slump since June 2016.”

Euro Zone Activity Comes to a Halt

The Euro zone’s manufacturing PMI was 55.1 in July, almost in line with the previous month's 18-month low. Output expansion was the second-weakest since November 2016. New order growth stayed at a 22-month low due to struggling export gains. New export orders saw the minimum expansion since August 2016, per tradingeconomics.

UK Manufacturing PMI Takes a Hit

IHS Markit’s Purchasing Managers Index for the industry dropped to a three-month low of 54 in July from 54.3 in June, per Bloomberg. The reading fell shy of economists’ estimates of 54.2. Output growth slowed to a 16-month low.

Japan Manufacturing Weakest Since August 2017

The Nikkei Japan Manufacturing PMI was 52.3 in July 2018 compared with June's 53. The data was the weakest since August 2017. New orders grew the least since October 2016, thanks to a decline in export orders. Output growth decelerated to a four-month low, per tradingeconomics.

Global Industrial ETFs in Focus

Given a raft of downbeat manufacturing data points in several economies, a look at the below-mentioned global industrial ETFs makes sense(see all industrials ETFs here).

iShares Global Industrials ETF EXI

The ETF is heavy on the United States, which occupies about 53% of the basket. Japan (15.6%), France (6.97%) and the United Kingdom (4.76%) take the next three spots. The fund rose more than 4% past month.

First Trust Global Engineering And Construction ETF FLM

The ETF is heavy on Japan (29.3%), followed by the United States (22.6%), France (8.75%) and Spain (5.24%). The fund added about 1.1% past month.

Global X China Industrials ETF CHII

The Global X China Industrials ETF seeks to provide investment results of the Solactive China Industrials Total Return Index. This fund is heavy on machinery & equipment (37.1%) industries, building & construction (29.5%) and Transportation (22.9%). The fund gained about 3.2% past month.

Industrial Select Sector SPDR Fund XLI
A look at U.S. industrial ETFs like XLI also seems warranted. The fund has the highest exposure to aerospace & defense (27.78%), followed by industrial conglomerates (16.7%). The fund advanced about 5.9% past month.

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SPDR-INDU SELS (XLI): ETF Research Reports
FT-ISE GLBL ENG (FLM): ETF Research Reports
ISHARS-GLBL IND (EXI): ETF Research Reports
GLBL-X CHIN IND (CHII): ETF Research Reports
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