A rebound in the services and manufacturing purchasing manager indices (PMIs) in August saw several economists scrap their predictions for a post-Brexit recession last week amid signs that any slowdown may not be as serious as first feared.
But with business investment levels still uncertain, consumer confidence shaky, and sterling’s weakness against the dollar meaning companies must weigh the prospect of stronger export figures against higher input costs, the outlook for domestic equities is still unclear.
Liontrust’s Stephen Bailey said the honeymoon period for some UK stocks could be short-lived.
Sterling’s decline may give a boost to exports, but many companies will see margins fall as related cost-push inflation kicks in. The latter reason has seen Mr Bailey turn more negative on the likes of supermarkets.
“The holiday period will end,” he said. “We are deluding ourselves if we think inflation doesn’t rise and consumers suffer over the next [year]. We have to be wary of companies that are too reliant on a margin and those importing goods.”
In addition, the manager of the Liontrust Macro UK Growth and UK Income funds said he expected sterling to continue a recent rebound against the euro, meaning firms banking on stronger exports to the continent have only a small window of opportunity.
Mr Bailey added: “You need to pick stocks with pricing power such as telecoms like mobile phone operators, BT and Sky.”
Old Mutual Global Investors’ Dan Nickols said the data so far had made it a guessing game as to the implications for the UK economy in 2017 onwards. However, the manager of the £858m Old Mutual UK Smaller Companies fund said he had paired back on exposure to retailers.
He said they would suffer from “higher import costs and cost pressures from the living wage, along with consumer uncertainty over time”.
The FTSE 250 index, home to a number of key domestic sector constituents such as housebuilders and retailers, fell almost 13 per cent in the immediate aftermath of the June 23 referendum, but a sizeable rebound since then means it is now up 5 per cent year to date.
Axa Investment Managers’ Jamie Forbes-Wilson said his experience of corporate meetings suggested the vast majority of company management teams had seen no impact since the vote.
“It is going to take time to see an impact, people just seem to be getting on with things,” he said. “There is all sorts of data coming through, but first-hand experience is there is no steep drop in confidence.
“It’s an each-way bet on whether inflation becomes an issue. This could be supply-driven and the consumer finds itself in a less comfortable position on a 24-month view.”
Although investment banks and other forecasters have upped their predictions for UK growth in the second half of 2016 in light of last week’s PMI figures, the revisions do not represent a significant overhaul.
GDP growth is still expected to remain almost flat for the period, while longer-term downwards revisions remain in place.
