It isn’t just the athletes in Rio that have been smashing records this summer. The latest PMI survey for August shows the biggest improvement in sentiment within the UK services sector since the survey first ran. This followed a record fall in July. Construction and manufacturing have seen similar rebounds.
The pattern is instructive. It is increasingly clear that the Bank of England scare stories around the impact of Brexit were – to put it kindly – inaccurate. The immediate dip in business confidence following the vote was largely a self-fulfilling product of these doom-laden prophecies. Thankfully it was short-lived. July’s surprisingly strong retail figures may have been down to the sunny weather, but they show that consumer confidence remains strong. The fall off that many predicted did not materialise. Businesses are starting to peer out from behind their curtains to see that the sky hasn’t fallen after all.
Psychologically speaking, it’s much better to be in a position where people were scared but then start to see that all is well, than the reverse. This often triggers bouts of enthusiasm, where sentiment can snap back quickly – as we’re beginning to see.
And contrary to the doom-mongers, there is every chance that UK equities are on the cusp of a pretty good bull market. Companies have gotten themselves into much better positions following the period of recession belt-tightening, and many are not that affected by the UK’s EU membership either way. The fall in Sterling will prove a boon for exporters as well as those with overseas earnings (this will buoy the FTSE 100, which is largely built on overseas earnings, but many smaller companies also increasingly have exposure abroad). It will make it a lot cheaper to invest in the UK too, which could prompt an influx of foreign capital (it didn’t take long for Japan’s Softbank to seize on ARM) – especially if the mooted cut in Corporation Tax comes to pass this autumn.
On the flipside, of course, the lower Sterling will on balance hurt domestic firms. However, many are still worth holding. Even fairly staid home brand retailers such as Debenhams and Laura Ashley – not typically seen as growth stocks – are currently delivering attractive yields. And Sterling could well swing back to its previous heights in the mid-term.
All this bodes well for UK equities. Historically speaking, markets tend to get very cheap or very expensive before they turn, and UK markets are currently a long way from either point. Bonds and deposits are yielding next to nothing right now, and could end up costing investors money should the double whammy of a rising oil price and lower Sterling trigger a bout of inflation. There will simply be nowhere else for a lot of money to go but into riskier assets. These are ideal conditions for a potential return of the cult of equity.
As always, there will be losers as well as winners. Some caution is justified; the picture could change once the nitty gritty of Brexit negotiations get underway, depending on what emerges. But in general the outlook is bright.
In light of this, the Bank’s decision to cut rates was reckless and premature. A more cynical person might even conclude that it was a win-win PR move (Economy suffers? Thank God we intervened. Economy does well? Thank God we intervened!) as opposed to a serious economic assessment. That’s fine for now, but it makes it that much harder to return to realistic rates over the mid-term – after what has already been nearly a decade of cheap credit. We are simply storing up pain for the future.
That is a problem, however, for another day. In the meantime, opportunity awaits!
Paul Mumford is is manager of the Cavendish Opportunities, AIM and UK Select funds.