Mercantile (MRC ) fund manager Guy Anderson presents the factors that convince him a strong consumer and manufacturing recovery is underway after last year’s historic pandemic slump.
This is an excerpt from Anderson’s presentation ‘Great British Companies – from Crisis to Recovery’ that he gave at a Citywire and JP Morgan Asset Management virtual event last week.
If this whets your appetite, you can watch the entire 54-minute recording here.
Can’t watch now? Read the transcript
It’s very clear that we have been through or are currently going through an extraordinary situation and it’s laid most clear when we look at the economic impact. I think it really is very clear for everyone to see that the pandemic has been extraordinary in terms of the economic impact. When we compare the impact in early 2020 versus the impact through the financial crisis post-2008, I think it really emphasises the magnitude of the fall, but the key thing from here and yes, the UK was more affected than many other economies, in part of course, due to the heavy reliance on the consumer, but when we look ahead and-, heavy reliance on the consumer and of course, services, which were more heavily impacted than manufacturing industries, but when we look ahead, the key thing for us is, what is the pace and scope of the recovery going to be? I have to say, I’m actually very optimistic at this point in time. When we think about the portfolio, it’s important to note that whilst we’re investing in mid and small-caps in the UK, those businesses, obviously, have a wide range of geographic exposure, but they are more domestically oriented than, for example, the FTSE 100, the large-cap market and in fact, when we look at the geographic exposure of the portfolio on a revenue look-through basis, Mercantile today, has around 57% of revenue exposure domestically versus 43% internationally. So of course, the opportunity for the domestic economy to recover is important and if we could just jump forward to the next slide.
This will give just a brief flavour of one of the reasons I’m optimistic of the prospects there. So, on the left-hand side, we show the consumer confidence data, which is incredibly important, really shows how healthy our consumers are feeling and the blue line-, sorry, the purple line shows the headline consumer confidence number over the last six or seven years and you can see that great big fall that we experienced at the beginning of 2020, which was of similar magnitude to the fall in consumer confidence that we saw back in 2008. So, consumer confidence is at a low absolute level, however, the key thing that matters here is the direction of travel and what we can see is that consumer confidence has started, gradually-, and in fact, accelerated recently, has started to recover. Now that, combined with the righthand chart, which shows the UK household saving ratio, is what makes me positive on the outlook for domestic consumption because savings have been substantially elevated through the pandemic, as a result of inability of consumers to spend, effectively. So, what that means is we’re coming out of this recession in a very different position to normal recessions, not that there is such a thing. Usually, exiting a recession, the consumer is in a relatively stretched position and so, consumption can only pick up gradually. Whereas, coming out of this recession, we’re in a position where there is something in the order of £150bn in excess savings over the last 12 months, which would be whatever it is, it’s about 8% of GDP, I guess. Now, if that can be deployed into the economy, that really can turbocharge the recovery, particularly, given how big a driver consumption is for the economic outlook. So, I think that’s the first thing on the domestic economy. If we think about the portfolio more internationally, one of the key areas of exposure is industrial companies. So, the industrial complex and if we just jump to the next slide.
Which shows a heat map-, it’s a pretty messy picture, but effectively, this chart just demonstrates that the global industrial recovery is well underway. So, this is a heatmap that shows purchasing managers index, which is effectively, a lead indicator for manufacturing in this case, over the last ten years across a range of different geographies and it’s just done on a heatmap basis. So effectively, red is bad and green is good. The key thing I would draw your eyes to here is the very clear red line that goes through the chart in early 2020, the vertical red line. That was clearly, the onset of the pandemic, at which economic activity hugely contracted. Industrial manufacturing hugely contracted, but then the important thing is the green lines that follow it. So effectively, we’ve gone from being in huge contraction into what is clearly a very positive expansionary period and that is why, when we think about the industrial side of the economy, we are increasingly optimistic.
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