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November 14, 2017

Pegler’s market report – 14.11.17: UK industrial production on winning streak


in Insights Press Releases

As published in the Brighton Argus (14.11.17) Business section under the title Pegler’s Market Report:

UK industrial production on winning streak

UK manufacturing and industrial production figures smashed expectations to confirm that the UK economy started to pick-up the pace in the third quarter. Industrial production is on its best winning streak for 23 years but construction plunged into contraction territory as political and economic uncertainty continues to plague the sector. Industry commentators highlighted that is a clear variation in performance by sector with private housing supported by the Help to Buy scheme and private commercial where new orders have fallen for three quarters.

While the uptick in the sector is encouraging, the persistent weakness in consumer spending is a much bigger concern for the Bank of England. The central bank has taken the first step to easing the strain on UK household incomes but inflation and wage growth figures over the coming days will determine whether that pressure is beginning to ease. Forecasts suggest that the pain for UK consumers actually increased in October but many economists believe that inflation will have peaked last month.

Markets remain a little on the back foot as fears intensify about a delay to the US corporation tax cut, coupled with some disappointing earnings, which pulled shares off their recent record highs.

The dividend yield of the leading UK index of the largest 100 companies currently stands at 3.8pc. The equity bulls claim that figure easily beats anything that can be obtained from developed market government bonds, which supports share prices as income investors choose to put their money into stocks instead of bonds. However, while the yield is attractive, dividend cover – which measures the ability of firms to pay dividends from profits alone – is historically low.

Ideally investors want to see dividend cover of two or more, which provides some safety in the event of a sudden shock. Currently dividend cover is estimated at 1.6 to 1.7 for 2018, and many of the highest-yielding firms have cover significantly lower.

Some analysts struggle to see where the UK is going. By comparison, many have strong conviction that Europe, the US and indeed emerging markets have a more positive outlook. The UK is considered mixed: low unemployment coupled with weak consumer confidence, for instance. That’s before you start contemplating the Brexit negotiations.

The role of central banks remains important too. The money they have pumped into markets since 2008, and rock-bottom interest rates, continue to provide support to stock markets. The removal of such stimulus is likely to be handled very cautiously, but is uncharted territory.

Fashion house Burberry has had a volatile week after respected Belgian billionaire Albert Frère upped his stake to 6pc while food manufacturer Bakkavor has revived its plan to float on the London Stock Exchange just a week after ditching its IPO due to market volatility.

By David Pegler, Brighton Capital Management