Manufacturing stocks, and companies generally, are stuck in a deep funk right now. Both Australian and US PMI (Purchasing Managers Index) have fallen by ~25% since mid-2021 (The Australian figure is Judo Bank’s own calculation). The Australian Chamber of Commerce and Industry-Westpac industrial survey found that confidence is at levels not seen since the GFC, even though the Australian economy is expanding. Specifically, over 40% of manufacturers in the survey thought things would get worse, a figure up from 15% barely 12 months earlier.
The manufacturing sector, long considered a crucial driver of economic growth and development, has been down for so long. This is despite the fact that it plays a vital role in providing employment opportunities, contributing to the country’s GDP, and fostering technological advancements. It begs the questions of why confidence is so low and whether or not it can pick up.
Factors contributing to low confidence amongst manufacturing stocks
There are several factors that have contributed to low confidence among manufacturing stocks. These include:
- Global Economic Uncertainty: The global economy has been facing several challenges, including trade tensions between major economies, geopolitical conflicts, and the lingering impacts of the COVID-19 pandemic as well as the wars in Ukraine and the Middle East. These uncertainties have created a volatile market, making investors hesitant to invest in stocks generally, but manufacturing stocks in particular.
- Decrease in Demand: With all of those uncertainties, demand for manufactured goods has decreased. This decrease in demand has resulted in lower revenues and profits for manufacturing companies, leading to lower stock prices.
- Rising Costs: Manufacturing involves significant costs, including raw materials, labour, and energy. In many cases, they need to be funded by debt. With rising costs of those inputs, fierce competition within the industry, not to mention higher interest rates, manufacturing companies are finding it more difficult to maintain profitability, leading to low investor confidence. We all know the headline of inflation peaked at the highest level in 40 years. However, it is coming down very slowly and some goods have gone up even more than that, while still remaining at high levels.
- Rapid Technological Advancements: Technology is evolving at a rapid pace, and it is disrupting traditional manufacturing processes. With the rise of automation and artificial intelligence, there are concerns about the future profitability of manufacturing companies that cannot pounce on these trends before their peers.
Is there potential for a rebound in 2024?
Despite the low confidence among manufacturing stocks, there a case to be made that there is potential for improvement in the industry. In particular, a smoother geopolitical environment, the cessation of rising interest rates (and maybe even cuts), rising consumer confidence and potential government support for the sector all could help. At the same time, even if all of these come to pass, they may not necessarily save all companies.
In our view, the most realistic outcome is some companies doing well, while others not. And as a matter of fact, this is the reality right now. Boral (ASX:BLD) for instance has gained 80% despite many construction companies dropping like flies. Under the tenure of CEO Vik Bansal, the company was able to pass price increases of over 12% through to its customers. Clearly this will be the key to other companies having similar success. The ability of companies to do so will depend on their position in the industry, whether or not they are price takers or price makers.
In conclusion, confidence among manufacturing stocks is stuck in the doldrums due to various factors such as economic uncertainty, decreased demand, rising costs, and technological advancements. However, with the potential for interest rate cuts and a smoother geopolitical environment in the year ahead, there is hope for improvement in the industry. For individual companies, they key will be to maintain margins, pass on cost increases successfully through to its customers.
As a crucial sector for economic growth, it is important for all investors (even those who don’t directly hold shares in these companies) to closely monitor what is going on, and take hints as to how their own investments may be impacted.
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