How are PMI figures and inflation set to affect the UK?

The notable surprise in the PMI numbers for February was the recovery in sentiment in the services sector which, taken at face value, points to output remaining broadly stable during February.

Elsewhere the trends were similar to those seen in Europe, with manufacturing still outperforming the service sector which continues to bear the brunt of the ongoing coronavirus restrictions. However, ongoing supply and Brexit related disruptions continue to hold back UK manufacturers. Looking ahead, the dynamic between these two sectors will be a critical factor to watch for investors gauging the state of the economy.

The PMI figures are consistent with a modest contraction of GDP in the current quarter, but we remain confident that there will be a strong rebound thereafter. The levels of business optimism in today’s surveys would suggest that firms share this view. Given this constructive outlook, we continue to position portfolios to benefit from a broad-based economic recovery.

Sterling has been a key beneficiary of the improving outlook; this is a trend we expect to continue in the coming months.

The flash UK PMI data for February indicates a strong improvement for services, from 39.5 to 49.7, way ahead of expectations and in spite of ongoing lockdown measures. Manufacturing also rose slightly from 54.1 to 54.9 and remains above the crucial 50 benchmark that signals expansion. Whilst the UK economy took a big hit last year and forecasts for Q1 growth remain sluggish, these numbers reinforce a growing sense of ‘cautious optimism’.

The UK is leading the fight against the pandemic, in development, manufacturing and implementation, with the fastest vaccine roll-out of any large country. As such, we think the economy has scope to bounce back strongly once lockdown is lifted, fuelled by pent-up consumption as households spend surplus savings. On that basis, we see upside potential for UK equities which remain attractively valued whilst also benefiting from the removal of Brexit uncertainty and a pending rotation towards a cyclical recovery.

The latest inflation data confirms the challenging environment for investors as a long period of low interest rates combined with lockdowns has resulted in a scenario where many consumers have accumulated a comparatively high level of savings in a low-return environment. Many are therefore sitting on cash piles that are not appreciating in value while agile companies, which continue to survive, and in some cases, thrive, by providing a product or service which has a genuine medium to long term solution to a recognised problem, require capital to continue to develop and grow. As a result, there is an inherent opportunity for investors and their advisers to address the funding gap and provide long-term support for growth-focused companies via the likes of the Enterprise Investment Scheme.

The types of companies we support, being innovative technology and life sciences companies, are by their very nature expected to be highly innovative and are therefore are generally focussed on addressing long-term market needs.

As we witnessed last year, we believe there should continue to be a genuine need for the research, development and/or products such companies are producing.

Of course, the life sciences sector has perhaps never seen greater focus and there continues to be great UK innovations in this space. The biggest problem for growing early-stage companies may be access to funding, but we expect UK investors and financial advisers to continue to utilise the Enterprise Investment Scheme (EIS) to support such great companies whilst allowing investors to benefit from the generous potential tax reliefs on offer. EIS has never been a more important Government tool for supporting the UK economy and it has never been more vital for investors to understand the potential benefits.