FT
The connection between market prices and economic realities is partial, uncertain, changeable and irrational. A connection there is, however, and after an equity market rout like Tuesday’s, causes will be sought, and fingers will doubtless point to poor earnings reports from two very large industrial companies: 3M and DuPont.
Sales at DuPont fell sharply and earnings per share got sliced in half. Organic sales growth was slightly positive at 3M and earnings rose, but profit targets for the year were cut. It is easy to moan about the declining US industrial base. The US was not the problem at either company, though. The problem was Asia, which represents a quarter of DuPont’s sales and almost a third of 3M’s. Du Pont saw Asian volumes and prices fall 10 and 5 per cent, respectively, excluding currency effects. At 3M, falling prices outweighed volume increases.
Du Pont noted two sources of pain in Asia. First, and more important, was the slowdown in Chinese construction and infrastructure spending. This hit the company’s performance chemicals business, which sells heavily to producers of paint and flooring. Second came excess capacity in the solar panel industry, which DuPont supplies with materials. It was also 3M’s electronics business which suffered most in Asia.
Yet encouragingly, if there is going to be contagion across developing markets, it does not appear to have started yet: Latin America was by far the strongest region for both companies (alas, the strong dollar diluted away the strong local results).
These numbers, unsettling as they are, illustrate the power, not the risks, of global diversification. Growth and profits in one region pick up when another slows. Investors should be thinking not just about returns, but also about investment. The question is not so much which companies will be hurt by the Asian slowdown, but which companies will seize the opportunity to invest in the region at the bottom of the cycle.
