Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson, the leading wealth management and professional services group which is set to re-brand to Evelyn Partners in the summer, comments on UK flash April PMI data.
The April UK composite Purchasing Managers’ Index (PMI) was lower at 57.6 (Reuters consensus: 59.0) from 60.9 in March. Services was weaker at 58.3 (consensus: 60.0), versus 62.6 in March, while manufacturing was stronger on 55.3 (consensus: 54.0), against 55.2 In March.
The bottom line is that the UK economy continues to show some resilience in the near term against headwinds coming from accelerating inflation, rising interest rates and higher taxes (i.e. national insurance), and the war in the Ukraine. Nevertheless, elevated inflation and tight monetary policy is taking its toll on the growth outlook: in its April World Economic Outlook, the IMF lowered UK real GDP growth for 2022 to 3.7% from its January forecast of 4.4%.
For now, the labour market provides a solid backdrop to support the economy against these headwinds. The UK unemployment rate fell to its pre-pandemic low of 3.8% in just 14 months in what is the quickest labour market recovery in three decades. UK vacancies are at a record high of over 1.3m. A solid labour market remains of source of growth to keep the economy expanding.
For instance, job creation (as well as a rising cost of living) has probably encouraged consumers to borrow more to sustain consumption. The February £1.9bn monthly increase in consumer credit beat consensus expectations of a £0.8bn rise and far exceeded the pre-pandemic average of £1.1bn. Moreover, rising employment is encouraging firms to raise capital investment. The latest CBI industrial trends survey in the first quarter showed the highest net balance of survey respondents that wanted to invest in plant and equipment for 34 years.
The real concern for domestic-driven stocks is that UK real GDP growth in 2023 has been revised down to just 1.2% by the IMF, the lowest rate in the G7 economies, from 2.3% previously. The fact that real retail sales in March disappointed economists’ expectations and GfK’s consumer confidence has deteriorated sharply highlights potential downside risk to discretionary consumption.
As such, it makes sense to focus on UK stocks that earn a high proportion of their revenues from overseas. We like sectors that typically perform well in a high inflation environment, such as energy, healthcare and consumer staples.