UK PMIs: Contraction in the economy is not a foregone conclusion – Fidelity

Paras Anand, head of European equities at Fidelity International, highlights why it might be premature to assume that a contraction in the economy is a foregone conclusion.

Key Quotes

“Today’s UK PMI data certainly makes for grim reading, but while growth may take a dip in the near future, there are reasons why it might bounce back.

“The referendum has made prospects for inward investment to the UK uncertain and most observers are convinced that the current political climate will lead to more overseas businesses shelving plans. This would act as a drag on growth over the medium term, but again I think this assessment may prove to be too cautious. 

“Over the last 12 months, the value of sterling has fallen by around 15 per cent, and over 20 per cent since its peak against the US dollar in 2014. This means that all assets priced in sterling – be they physical property, intellectual property or human capital – look attractive in a global context. I expect to learn more about the impact of this as my colleagues and I engage with company management teams over the next weeks and months.

“There are other factors at play which may trigger new activity: the uncertain outlook for end demand over the past few years has led to companies hoarding cash. This has been most visible in sectors such as software and healthcare but is a broader phenomenon. I think this suggests that the medium-term outlook for corporate activity remains robust and would not be surprised to see a number of significant bids for UK-listed companies before the year is out.

“Amid the current market volatility and breathless political commentary, you may think me overly optimistic. But prevailing political states are almost never considered ideal. Economic growth can often follow a path quite independent from that desired or imagined by the political agenda. The relatively robust performance of the UK economy in recent years has been broadly-based and not heavily reliant on a single sector.”