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Are there reasons to be cheerful?

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

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Maybe it’s a bit too early to say Spring is in the air. While the days may be getting a little longer and some signs of life may be appearing in the garden, we have to wait till March to officially leave the winter gloom behind us.

Yet when it comes to the outlook for the UK economy, three IHS Markit/Cips Purchasing Managers Index (PMI) surveys out this week suggest some optimism is in the air.

The PMI surveys are published monthly and scrutinised by business decision makers, market analysts and investors as they provide a real-time indication of the state of an industry sector often before comparable, official statistics are published.

Each month a survey is sent to senior executives at the coal-face of the economy asking for their view on the current market conditions in their sector. This is then used to create a headline number from 0 to 100. A PMI above 50 represents an expansion compared to the previous month, while a reading under 50 represents a contraction. A reading at 50 indicates no change.

So how did the UK fare in the latest January figures? Not bad actually, all things considered. However, as you would expect it depends on the sector.

Let’s start with the manufacturing PMI which was the first figure out this week. For manufacturing the UK scored 50 - a nine-month high and up from 47.5 in December.

Some gloom appears to be lifting in the sector with 47% of manufacturers forecasting that output would expand over the year ahead.

This stabilisation in the manufacturing sector is largely due to the removal of some uncertainty the economy faced following the general election as well as the easing of the global downturn following the signing of the phase one US-China trade deal. Of course, this may change next month as the effects of the coronavirus outbreak become more known.

The next PMI figure out this week was UK Construction which scored 48.4 in January. While a score under 50 is seen as a contraction, it is well above December’s score of 44.4 and is an eight-month high, indicating rising hopes that the outlook for the UK’s construction industry is turning more positive.

Housing was the best performing part of the sector, with only a slight deterioration in activity, while commercial activity decreased for the 13th consecutive month.

Finally, yesterday we learned the all-important Services sector PMI. This figure is keenly watched as it includes banking, insurance, restaurants and hotels which make up about 80% of the UK economy. This came in at 53.9 in January - its highest level in 16 months and up from 50 in December.

According to the survey, staff hiring increased, with higher levels of consumer spending and business investment contributing to the overall rise in new work. Export sales returned to growth in January but the rate of expansion was only marginal.

Tim Moore, Economic Associate Director at IHS Markit said “January's PMI surveys give a clear signal that the UK economy has picked up since the general election, as a diminishing headwind from political uncertainty translated into rising business and consumer spending.”

However, he cautioned "With the vast majority of PMI survey data collected prior to 23rd January, we've yet to see any overall impact on business conditions from the Wuhan coronavirus outbreak”.

With 75-80% of the FTSE 100’s earnings generated overseas any disruptions to global supply chains and international travel could present risks to the UK economy in the coming months.

The Bank of England will also be closely watching the effect of the coronavirus. Last week the Bank kept rates on hold. The recent stabilisation of economic indicators, a slightly better housing market and modestly greater consumer confidence were enough to persuade the Monetary Policy Committee to leave the base rate at 0.75%, despite the weakening in growth at the end of last year, disappointing pay figures and falling inflation.

Investing is all about anticipating the future profitability of companies in a dynamic, ever-changing world. The PMI surveys provide a real-time barometer of what’s happening on the front line and with some uncertainty being lifted after the December election, there’s a level of cautious optimism out there.

After over three years of Brexit deadlock, the UK has been overlooked by many investors, providing attractive opportunities for active fund managers looking to uncover companies with the potential to outperform.

The Fidelity Select 50 features a range of funds investing in the UK such as the Fidelity Special Situations Fund which takes a more contrarian approach and the Liontrust UK Growth Fund which looks for companies with pricing power and the ability to charge a little bit more, which in turn could lead to high and sustainable profits.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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