- We respond to questions following our piece last week and conclude that our analysis is broadly supported by Bureau of Economic Analysis (BEA) data. BEA data also shows that the Manufacturing Inventory to Sales ratio in the US is at a 25 year high.
- BEA data shows inventory moving from consumers to manufacturers over time. This makes sense as consumers improve “just in time” inventory management and this may explain much of the manufacturing increase – however, we see scope to reduce manufacturing inventories, as we are above trend today.
- Lower manufacturing activity in the US over the March/April period has likely driven an inventory correction in Q2 2012. This will result in some negative surprises for the quarter as companies cut operating rates to manage inventory. We would expect revised guidance from some companies as May numbers are finalized.
- All of the sectors we cover except Metals and Mining look overvalued on a relative basis ahead of any potential inventory correction and the impact that it will have on margins and operating rates. Most exposed are Chemicals, Electrical Equipment and Paper. Capital Goods underperformed meaningfully in May, but still has some downside.
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