UK Manufacturing: 'Are you missing the point?'
The $300bn UK manufacturing sector continues to defy the difficult politics of the UK and investors risk missing the opportunity.
According to the EEF's latest quarterly 'Manufacturing Outlook' release sector sentiment is at record highs (+34pc, up from an already robust +26pc last quarter), driven by strong orderbook growth, particularly in export markets.
There is no doubt the weaker pound is helping this endeavour but the press and some investors are positioning this as the primary or sole driver of UK manufacturing growth. This is questionable. They are also looking at the Brexit discussion as the sole determinant of future performance. This is a leap and it is, in our view, wrong.
The analysis is over-simplistic and the base conjecture, that even a successful negotiation (which seems quite unlikely) would see the £ return to pre-June 2016 levels, is a largely baseless one. As a single economy, outside the EU, the impact of global events on the UK and the £ will be fundamentally different.
More importantly, it spectacularly fails to recognise what is actually happening in UK manufacturing:
- UK manufacturing domestic sales are also performing strongly;
- Most UK manufacturing requires either imported or $ denominated inputs so FX is far from a one-sided bet; and
- The £ has collapsed before and there was no equivalent improvement in manufacturing performance. Pricing helps but manufacturing customers buy on engineering, quality and performance as well.
A huge amount of good work driving innovation and supporting businesses is done by the EEF and a number of other bodies and schemes like Innovate UK reflect improving Government support for emerging UK manufacturing and technology businesses. Schemes to support IP development and apprenticeships have also seen demonstrable positive results. I have written before about the opportunities emerging through 4IR.
UK manufacturers are increasingly seizing the opportunity and both capital investment and employment in the sector have grown steadily quarter-on-quarter since the immediate aftermath of last year's vote. Cash garnered now is being used to improve output and competitiveness and investment in the future will pay dividends. UK manufacturing growth is set to accelerate this year against slowing growth in the wider economy.
When we look at the trends in our own work at Arrowpoint Advisory on transactions the % of UK manufacturing assets marketed to and sold to international buyers is larger than any other sector and international buyers, both trade and financial, consistently bid over 10% higher than UK bidders, sometimes far far more. There is significant value in this sector, something too few UK investors recognise.