Navigating Global PMI Divergence: Opportunities in a World of Economic Contrasts

The second quarter of 2025 has underscored a stark divergence in global manufacturing health, with the U.S. and China edging toward stagnation while Canada faces outright contraction. These divergent trajectories—driven by trade policy disputes, supply chain disruptions, and uneven stimulus efforts—are reshaping investment landscapes. For investors, the challenge is to identify regions and sectors poised to weather these headwinds, while avoiding those trapped in cyclical decline.

The U.S.: Resilience Amid Contraction

The U.S. manufacturing sector, as measured by the ISM Manufacturing PMI, dipped to 49% in June 2025—its fourth consecutive month below the expansion threshold—but showed signs of stabilization. While new orders and employment remain weak, production has rebounded slightly, and businesses are cautiously optimistic about future demand. Crucially, U.S. consumer-driven equities—such as retail, healthcare, and technology—have proven more insulated from manufacturing headwinds, buoyed by robust labor markets and fiscal support.

Investment play: Overweight U.S. consumer staples and healthcare stocks, which benefit from steady demand and pricing power. Consider ETFs like XLY (Consumer Discretionary Select Sector SPDR Fund) or VHT (Vanguard Healthcare ETF), which have outperformed industrial indices in 2025.

Canada: A Manufacturing Crisis

Canada's manufacturing sector has collapsed, with its PMI plummeting to 45.6 in June—the steepest decline since 2020. Tariffs on steel and aluminum from the U.S., coupled with supply chain bottlenecks, have crippled industries like automotive and machinery. Exports to its largest trade partner, the U.S., have fallen 1.3% month-on-month, exacerbating the contraction.

Avoid: Canadian industrials, including autos and energy equipment, which face prolonged weakness. Investors should instead focus on diversified Canadian firms with exposure to services or commodities (e.g., mining or financials) that are less trade-sensitive.

China: Manufacturing Decline, Services Resilience

China's Caixin Manufacturing PMI inched up to 50.4 in June, barely above contraction, as U.S. tariffs and weak global demand persist. While Beijing's stimulus has delayed a sharper downturn, overcapacity and price wars in manufacturing sectors like textiles and electronics are squeezing margins. Yet China's services sector, which accounts for 55% of GDP, shows relative strength, with tourism, fintech, and healthcare expanding as consumers shift spending.

Investment opportunity: Chinese services stocks, such as fintech platforms (e.g., Ant Group) or healthcare providers, could outperform manufacturing peers. However, geopolitical risks and regulatory uncertainty in China demand caution; consider diversifying via broad emerging markets ETFs (e.g., iShares MSCI Emerging Markets ETF (EEM)).

Emerging Markets: Services as the New Engine

The broader emerging markets narrative aligns with China's services boom. Countries like India, Indonesia, and Vietnam are capitalizing on their lower manufacturing dependence, with strong growth in IT services, logistics, and digital infrastructure. For example, India's IT exports rose 14% year-on-year in Q1 2025, insulated from global manufacturing slumps.

Strategic play: Allocate to emerging markets services sectors via ETFs like the iShares MSCI Emerging Markets ETF (EEM) or region-specific funds focusing on Southeast Asia.

Trade Policy: The Wildcard

Trade tensions remain the greatest risk. U.S. tariffs on Chinese goods—particularly those linked to the fentanyl crisis—could worsen if diplomatic talks fail. Meanwhile, Canada's reliance on U.S. demand leaves it vulnerable to protectionism. Investors should monitor the August 2025 expiration of U.S.-China trade truces as a key inflection point.

Conclusion: Position for Divergence

The PMI data of Q2 2025 paints a clear path: avoid cyclical sectors in Canada and China's manufacturing, but capitalize on the U.S. consumer and emerging markets' services-driven growth. Diversification and a focus on secular trends—such as digitalization and healthcare—will be critical in navigating this uneven recovery.

For now, the playbook is clear: rotate into U.S. consumer stocks, emerging markets services, and defensive sectors while hedging against trade risks. The divergence in global PMIs isn't just an economic indicator—it's a roadmap for where capital can thrive in 2025.