August activity disappoints<\/strong><\/p>\n\n\n\n The S&P Purchasing Managers’ Index (PMI) reading for August shrank from 51.9 in July to 49.7 in August, thereby signaling a contraction in manufacturing activity with the 50.0 mark being the threshold. Weakness was reportedly brought about by a drop in new order volumes and slowing output, both of which account for a collective 55% of the PMI measure. <\/p>\n\n\n\n Sector has been showing some deterioration<\/strong><\/p>\n\n\n\n The manufacturing sector\u2019s contribution to GDP has been showing signs of a declining trend, and if we were to exclude the pandemic, 2Q 2023 would actually mark its lowest share in the past 10 years. Additionally, YoY growth was also flattish at 1.2% and well below the pre-pandemic median level. This tells us that manufacturing as a whole has not yet recovered from the impact of lockdowns despite 3 years having already passed. The sector\u2019s output value in real terms still falls short compared to the same period back in 2019. With August now having been confirmed as a down month for the industry, and with inflation once more on the rise, we can most likely expect Q3 to be another challenging quarter for manufacturers as demand for their output will continue to take a hit.<\/p>\n\n\n\n Knock-on effects to GDP and listed manufacturers<\/strong><\/p>\n\n\n\n In lieu of this, short-term prospects are not looking good for listed manufacturers. DNL immediately comes to mind, given that first half results have been marked by disappointing sales volumes. Though there are a few hidden gems scattered about in the form of companies with heavily discounted valuations (URC), as well as those with above-peer prospects (CNPF), we would generally advise investors to underweight the sector for now. <\/p>\n\n\n\n Additionally, anemic manufacturing activity could also be a harbinger for further weakness in the economy, particularly for household consumption. As such, we continue to maintain the view that consumer spending for Q3 will likely see further QoQ deterioration, which would make meeting the government\u2019s target range of 6 to 7% an uphill battle.<\/p>\n\n\n\n