Forward-looking survey-based manufacturing data has marked a disappointing start to the second quarter. This week the US ISM manufacturing report came in at a two-year low of 52.8 for April, well below expectations for 55.0. Headline China manufacturing PMI also disappointed, moderating to 50.1 from 50.5 the previous month. On 2 May, final April manufacturing PMIs for the Eurozone were revised up fractionally, but Germany was revised down to 44.4, still firmly in contractionary territory.

PMI data are an important input into investors' short-term expectations for equities, and can provide signals about the more volatile components of growth. But we would caution against becoming too pessimistic about the prospects for global manufacturing and global growth, as the hard data paints a different picture:

* The manufacturing slowdown has been concentrated not widespread. In 4Q 2018 advanced economy manufacturing growth slumped from close to 3% to zero. Of that drop 70% was attributable to Germany and 15% to Italy.Figure 1: G5 contributions to real manufacturing production growth

* The decline was also concentrated in machinery. Companies have been delaying investment due to a number of uncertainties, including US trade tariffs and Brexit. Lower investment leads to a decline in orders for machinery. This fits with the German story, where machinery is an important part of the economy. Germany dragged down global manufacturing because machinery production dragged down German manufacturing.

* There’s more to growth than manufacturing of investment goods. Production of consumer goods has not slowed significantly as the household sector remains strong. The large amount of detailed data reported for manufacturing also means that “frequency bias” can lead investors to over-emphasize the importance of manufacturing relative to services. Manufacturing is undergoing big structural changes as digitization replaces goods with services (streaming leading to the demise of physical CDs is one example) and will continue to become a smaller proportion of advanced economies.There are signs in the data from the US and Asia that investment is starting to stabilize, which means in turn that manufacturing should start to improve. In our base case, we are looking for global economic growth to stabilize around its long-term trend, and for a partial resolution to the China-US trade dispute. This backdrop should help support global equities and we see opportunities in Japanese, emerging market and Canadian stocks. We think that Eurozone equities have largely priced in the macro recovery we expect and so are underweight in our international equity portfolios.