DR.CHENJIAZI ZHONG

In Brief

• U.S.: 10-year yield slips to lowest in a month; The DJIA closed above 22,000 for the first time; U.S. companies post profit growth not seen in six years; a very strong jobs report for a maturing cycle
• Manufacturing tailwind continues: Manufacturing in the Eurozone, U.K., and the U.S. continues to enjoy a significant tailwind despite the political landscape
• Non-manufacturing declined: Significantly below consensus forecasts and the lowest reading for 11 months
• Equity strategy: Considering incorporating ESG to portfolios

On the U.S.

U.S. Treasury yields fell to more than one-week lows on Thursday after the Bank of England kept interest rates at a record low and downgraded its economic and inflation forecasts, raising concerns about global economic growth. Investors had begun to price in the chance that the BoE might raise interest rates this month for the first time in a decade. Thursday’s decision sent yields on 10-year UK government debt tumbling to their lowest since June 28.

The Dow Jones Industrial Average (DJIA) on August 2 notched a psychological milestone at 22,000, highlighting a steady record ascent for the blue-chip benchmark. The DJIA hit its 32^nd record close of the year, powered by a rally in shares of Apple Inc. and Boeing Co.

The largest companies in the U.S. are on pace to post two consecutive quarters of double-digit profit growth for the first time since 2011, helped by years of cost-cutting, a weaker dollar and stronger consumer spending. Earnings at S&P 500 companies are expected to rise 11% in the second quarter, according to data from Thomson Reuters, following a 15% increase in the first quarter. Close to 60% of the firms in the index have reported second-quarter results so far.

U.S. payroll employment rose 209,000 month on month in July, which is very solid given that the economy is near full employment. Gains were broad based. Household employment rose 345,000 month on month. The U.S. unemployment rate declined to 4.3%, with underemployment remained at 8.6%. Wages rose 0.3% compared to the previous month and 2.5% compared to the previous year.

Manufacturing Tailwind Continues

Manufacturing in the Eurozone, U.K., and the U.S. continues to enjoy a significant tailwind despite the political landscape. For the seven months of 2017, both the Eurozone and the U.S. PMIs have averaged 56.4 and the UK posted 55.2 for the period. Manufacturing is enjoying strong growth easily outpacing Non-Manufacturing which is typically slower to respond.

The Eurozone PMI (56.6, -0.8) fell back from its highest level in 74 months but still looks quite strong. The continuing expansion is led by Austria, Netherlands, and Germany. Even more encouraging, all eight Eurozone countries, including Greece, reported a PMI above the 50 mark for the second consecutive month.

The UK PMI (55.1, +0.9) rose above the monthly average for the post BREXIT period, helped by a “near-record” expansion in new export orders – the biggest surge in export orders since 2010. The U.K. also reported employment at almost record levels. The U.K. PMI exceeded the consensus forecast of 54.4 in a Reuters poll of economists.

According to China’s Official Report, the CFLP PMI (51.4, -0.3) continued above 51 for the tenth consecutive month. The Caixin China General Manufacturing PMI (51.1, +0.7) signaled the second month of expansion after a one-month decline. Realistically, the China data reflects little variability making the measurement of change problematic.

Noteworthy is the significant decline in the India (47.9, -3.0) Index which reflects the impact of a new Goods & Services Tax is implemented. Also, Taiwan (59.0, +1.4) continues to post very strong numbers as current and anticipated product rollouts drive the semiconductor industry.

In North America, Canada reported growth for the 17^th consecutive month, with an average of 55.0 for the first seven months of 2017. Mexico recorded its 48^th consecutive month of growth. The rate of growth of the U.S. manufacturing sector, as measured by the ISM PMI™, slowed to 56.3 during July, but it still tells a story of significant month-over-month expansion. Overall, of the 18 manufacturing industries, 15 reported growth in July.

Non-Manufacturing Weakens

The ISM Non-Manufacturing Index (NMI) (53.9, -3.5) decelerated during July, indicating weaker growth in the sector, particularly in the key components of the NMI. The NMI averaged 56.9 for the first half of 2017, which places the July Index significantly below average. The deceleration in the NMI was led by New Orders and Business Activity, while the Employment Index fell to its lowest level since April. Supplier Deliveries contributed to the deceleration in the composite index. The 15 non-manufacturing industries reporting growth in July.

Other Thought: Incorporating Social and Corporate Governance (ESG) 

First, the ESG metrics have been strong indicators of future volatility, earnings risk, price declines, and bankruptcies. Second, trends in the U.S. investment landscape suggests that trillions of dollars could be allocated to ESG-oriented equity investments, to stocks that are attractive on these attributes. Most importantly, ESG-type investment strategies may be a self-fulfilling story.

ESG’s growth in the US is just gathering momentum. Estimated assets under management (AUM) of traditional US-domiciled sustainable, responsible and impact investing (SRI) assets has grown to nearly $9 trillion, an impressive 33% 2-year growth rate, but are still just one-fifth of assets. In Europe, ESG is part of the investment decision for 60% of AUM. As interest in ESG investing moves from specialists to generalists, areas for potential growth include pensions and endowments, millennials, and quants or passive.