- Before the election and Brexit, I was insisting that the UK economy was fundamentally strong but held back by the joint uncertainties.
- The implication of that was that once the election was decided - that in itself deciding the Brexit question - we would see a rebound in confidence and thus growth.
- This is what the UK PMIs are showing, that the Boris Bounce is here. I am therefore confident - subject to the coronavirus of course - about future growth.
The essential case
I have been saying for most of the past year that the UK economy was fundamentally strong. Employment was high, unemployment low, no sign of inflation, really, no reason why we shouldn't be seeing substantial growth. Except, of course, we weren't.
The reason we weren't is that the economy faced uncertainty. As Keynes went to great lengths to point out, the business cycle is driven by the "animal spirits" of businessmen. Business investment being driven by those opinions, business investment being the section of GDP that varies the most over the business cycle and which drives that cycle.
One uncertainty was over Brexit - would it even happen, if it did under what sort of terms and so on. Then toward the end of the year - from the autumn, when it became obvious that there would need to be an election - there was that uncertainty over whether Jeremy Corbyn would become prime minister. Leave aside any political views about progressives and so on, his ascendance would not have been good for us investors, capitalists as we are.
The proof of the pudding for this contention is whether there has been a bounce since the uncertainty was resolved. Last month's figures show there was, at least in embryo. This month's PMIs show that the resurgence has legs.
We still have external events like that coronavirus to think about but internally to the UK economy, we're lookin' good.
What this means for us as investors is that the UK-oriented - which is different from the UK-listed - companies are buys.
UK Manufacturing PMI
The UK manufacturing PMI numbers show continued expansion:
The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) rose to 51.7 in February, up from 50.0 in January, but below the earlier flash estimate of 51.9. The PMI posted above the 50.0 neutral mark for the first time in ten months. Manufacturing output increased at the fastest pace since April 2019,
Note that this is entirely different from the European example, where manufacturing output has been falling over this same period. And in the US, growth has been slowing. We must have a unique to the UK event to be producing something so different. Which, of course, we do, the lifting of those joint uncertainties.
(UK manufacturing PMI from IHS Markit)
This is entirely contrary to near everywhere else. Something different is indeed happening in the UK economy.
UK services PMI
We also have the numbers for the vastly more important services part of the UK economy:
Adjusted for seasonal influences, the headline IHS Markit/ CIPS UK Services PMI® Business Activity Index registered 53.2 in February, to remain above the crucial 50.0 no-change value for the second month running. The latest reading was down from 53.9 in January, but still the second-highest since September 2018. Companies reporting an upturn in business activity widely commented on a boost from receding political uncertainty and strong domestic economic conditions.
It's the same story here. A boost to the economy from the removal of that uncertainty. And this being added to the essentially strong underlying of the UK economy.
(UK services PMI from IHS Markit)
So, yes, that initial analysis is proven. Remove the uncertainty and given the strong underlying conditions in the UK economy, we are seeing decent growth. This obviously has knock-on effects to the profits of companies operating in that economy.
PMI to GDP growth
Just to check we might have a look at how closely the PMI does track immediate future GDP growth:
Okay, we're not going to say that it's a perfect fit, but it's a pretty good forecasting method all the same. We would assume that a strong rise in the PMI is consistent with decent GDP growth at least.
But, but, coronavirus
We do have that external impact to come, the coronavirus. As I've been saying, the effects of the disease upon an economy aren't all that great. And we're aware from the Chinese numbers that the effect is pretty short term. So, well, maybe not that much effect then?
However, we can go deeper than this by combining with our knowledge about the London Stock Market. About 75% of the FTSE 100 revenue is non-sterling, from outside the UK. About 50% for the FTSE 250. That means we want to distinguish between the UK-based stocks and the UK-listed stocks.
I've used these examples before, but they'll work again here. Antofagasta (OTCPK:ANFGY) mines copper in Chile, sells around the world in dollars and is listed in London. It is reliant upon world prices and world demand - something rather depressed for most commodities right now. Admiral sells insurance, in Britain, to Britons. If the UK economy is doing better than the global, then the effects on the two stocks are going to be different. The same is true of BHP - a global miner - and Berkeley, a domestic housebuilder.
So, yes, British stocks look a buy compared to non-British at present. We've outperformance in the British economy as a result of that local effect from uncertainty alleviation. But that means that it's stocks servicing the British economy, not those merely listed in London, that we want to be investing in.
I am rather swanking it about given that I got the Boris Bounce prediction correct. But there's more to it than just that of course. It is true that we're gaining outperformance in the UK economy at present. Compared to mainland Europe we've a boom going on, not that that's all that great an achievement over the eurozone.
We do though need to be selective. It's companies operating within the UK economy that will benefit, not those just listed in London.
The investor view
As above, British companies are looking good now. Operating in an economy that is outperforming the rich country average. As a result of that depressed growth recently from the now lifted uncertainty. But be selective, it is, again, not just companies listed in London and it's not just the main indices.
Selection of companies actually part of the British economy is necessary.
This article was written by
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