January 3, 2017    2 minute read

UK PMI: Strong, But Not All Manufacturers Are Equal

The Larger Picture    January 3, 2017    2 minute read

UK PMI: Strong, But Not All Manufacturers Are Equal

Accelerated by increased domestic and international orders, the UK PMI hit two and a half year-highs last December, which means that the UK stock market continues to provide investors with considerable confidence against all odds.

Growing Interest

With this data being released yesterday, bulls rushed the equity markets resulting in the FTSE 100 also hitting a new record, closing at 7177.89, up 0.49% for the day. Considering this, one could say that the British economy has performed much better than expected. In the wake of deciding to leave the European Union, it seems that consumer confidence is still high, people are spending, and companies are continuing to fill orders.

What Does It Mean?

Should the UK PMI convince investors to buy manufacturing stocks? It has not been that simple for all manufacturers. The Market CIPS UK PMI Index measures an “average” confidence level across many manufacturing industries, but not all types of manufacturing firms have experienced this stunning recent growth.

For example, the dollar/pound exchange rate currently stands at 1.22 in comparison to just 1.46 a year ago – a near 20% drop. For UK manufacturers with costs in the UK and a significant volume of sales into North America, this represents a fantastic opportunity to maximise profits. On the flip side, those manufacturers with costs based abroad – for example in Europe, the US or China (a great deal of Chinese foreign purchases are in dollars) and sales in North America – have effectively been hit with two profit cuts. The first one was on bringing their profits from America home, and the second the reduced purchasing power of their pounds on imports. Rob Dobson, Senior Economist at IHS Markit, said:

“The boost to competitiveness from the weak exchange rate has undoubtedly been a key driver of the recent turnaround, while the domestic market has remained a strong contributor to new business wins.”

The reality is that, although PMI is a leading indicator when it comes to manufacturing stocks, a multitude of factors actually impact a company’s value. But one thing is for sure: overall, the UK is showing good performance. On the bright side, PMI figures are also a lead indicator of GDP, so one can expect increased growth soon too. Still, increased strength in the UK market will attract further foreign investment, pushing the pound’s back on an upwards path, which could perhaps bring a reversal in PMI in the coming quarter. These are very exciting times indeed.

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