A challenging H2 ahead for EM manufacturing

Emerging Market (EM) manufacturing PMI showed a June recovery, primarily led by China's regained momentum and India's continued outperformance. However, most EM surveys remained at subdued levels, and the sector faces a challenging second half of the year, indicating a mixed and difficult outlook for EM manufacturers despite recent improvements.

Analysis

The Emerging Market (EM) manufacturing Purchasing Managers' Index (PMI) showed a recovery in June, but the improvement was narrowly concentrated. The headline figure was primarily driven by positive developments in the two largest EM economies: China, which regained some momentum, and India, which continued its trend of outperformance. However, this strength is not indicative of a broad-based recovery, as manufacturing surveys in most other emerging markets remained at subdued levels. Furthermore, the forward-looking outlook is explicitly cautious, with the report forecasting a difficult second half of the year for the EM manufacturing sector. This suggests the recent uptick may be fragile and highlights a significant divergence in performance within the EM asset class.

Key Decisions for Investors

• Given the bifurcated recovery and a difficult H2 outlook, investors should exercise caution with broad-based emerging market exposure, such as through the EEM ETF.
• Consider a relative value strategy, potentially overweighting exposure to India (INDA) and China (MCHI) where data shows continued outperformance and regained momentum, respectively, compared to the broader EM complex.
• Closely monitor upcoming manufacturing data from EMs outside of China and India to assess whether the recovery is broadening or if the weakness in the majority of markets persists, which would validate the report's cautious forecast.