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More Clarity

28 January 2020

More Clarity

Well that didn’t take long. In my last post I suggested the calls for an interest rate cut were premature and that the PMI figures moving into the new year would show a marked increase in confidence following months of pre-election and Article 50 deadline stagnation. On Friday IHS Markit’s PMI (purchasing managers’ index) for January reported a very strong recovery from 49.3 to 52.4, a level last seen more than a year ago. Anything above 50 is a signal of growth. The PMI suite of indices are measures of confidence in the private sector economy and tend to be pretty accurate signals of economic growth in the pipeline. This month’s figure paints a picture of the economy beginning to grow again in the wake of Boris’s election victory.

The data was supported by a survey by the CBI reflecting a sharp improvement in optimism from the manufacturing sector and a marked increase in investment intentions. The irony of this from what has been a strong anti-Brexit institution will not be lost on the government, I am sure. This was followed by much stronger mortgage lending figures for December. Surely common sense would dictate the Monetary Policy Committee stays its hand at its next meeting on Thursday and leaves interest rates unchanged. I think we may all be surprised just how strongly the economy will recover from the prolonged period of stagnation. The increasing torpidity throughout last year was tangible. The Brexit solution seemed evermore elusive and commercial decision-making went from caution to lethargy to complete apathy. Then, hey presto, the fog cleared and the sun shone. Many of these decisions were postponed, not cancelled. A clearing of the bottle-neck is likely to create a sharp boost to activity.

Meanwhile, across the Channel things seem to be moving in the opposite direction. Having enjoyed a minor rebound in economic activity over the last few months, signs of stagnation are creeping in again. The EU’s PMI was unchanged at 50.9, still signalling weak growth but the upward trend coming to a halt. As I have written many times in recent years whenever the No Deal possibility raises its head, the EU has more to fear from it than do we. How do you think Germany feels about losing its annual trade surplus of almost £50bn with the UK? The Teutonic car industry would be up in arms, as would the French wine and cheese industries. Last year the UK’s trade deficit with the EU will have been around £70bn – I suggest that will focus the minds as trade talks progress towards a conclusion late this year.

In the meantime, Brexit’s done, now business can get on with doing what it does best – business! But wait. Another worry – coronavirus! The rapid spread of this new disease coming out of China has stopped global markets in their tracks. Of course, it is impossible to know the final outcome of something like this and the uncertainty is exacerbated by the doubts about Chinese veracity on the subject. The SARs epidemic back in 2003 was over relatively quickly but markets were different then, still suffering from the tail-end of the Dot-Com bubble burst. I suspect that whether the current scare is long or short-lived, the UK stock market will fare better than most.

Whilst not throwing caution to the wind (by all means retain reasonable levels of cash) a sensible approach would be to invest in well managed, UK focussed investment trusts. Two we particularly like are Mercantile Investment Trust and Finsbury Growth and Income Trust. The former is managed by J P Morgan and has returned top quartile performance over 1, 3 and 5 years. Priced at 261p the shares are currently available at a small discount to Net Asset Value (273p) whereas they are often priced at a modest premium. The latter is managed by Lindsell Train and is a bit more concentrated. However, its performance is top quartile over 3 and 5 years and the shares, at 881p, are also priced at a modest discount to NAV (907p). Both look attractive for the medium risk investor, Finsbury a little more punchy due to its more concentrated portfolio.

Russell Dobbs FCSI

Chartered Wealth Manager