24th January 2022

Reasons for optimism on UK economy and equities despite slight undershoot for January flash PMI, says TS&W's Casali


The January flash composite purchasing managers’ index (or PMI, an early read on economic growth) for the UK came in at 53.4 - slightly lower than consensus expectations of 54.8, and down from 53.6 in December. The reading for the services sectors was 53.3 (versus consensus expectation of 54.0, and December’s reading of 53.6), while manufacturing was 56.9 (versus expectation of 57.9, and December’s 57.9).

Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson, the wealth management and professional services group, says that despite the slight undershoot compared to expectations, the readings should not be a cause for pessimism over the UK economy.

‘Much of the concerns about long-lasting damage to the UK economy from covid appears to be misplaced,’ he said. ‘Employment and GDP are now higher than the pre-pandemic February 2020 level. Moreover, GDP recovered all the lost output over the past two years far quicker than the five years it took after the previous recession during the Global Financial Crisis in 2008.’

He added: ‘Nevertheless, UK relative equity market valuations are still below the pre-pandemic level. The MSCI UK 12-month forward PE currently stands at 12.3x, or 7% below the level in mid-February 2020. On balance, less risk of lockdowns and still-cheap UK equity valuations offers an opportunity for investors. This probably helps to explain why the UK has outperformed global peers so far this year.’

With regards to the broader economic impact from covid in the UK, the outlook appears less clouded than it is on the continent.

‘Covid new cases are trending down and around 54% of the UK total population have received a booster shot (one of the highest rates in the world),’ says Casali. ‘This lowers the necessity to lockdown large parts of the economy. Moreover, the public backlash against parties held at Number 10 that broke covid rules, the threat of a rebellion from party backbenchers and the fact that the Tories are around 10 points behind Labour in recent opinion polls make it politically difficult for the PM Johnson to reintroduce restrictive measures.’

He added: ‘Considering May local elections are not too far away, the government is moving to a market-friendly strategy of “Living with Covid” that scraps growth-sapping covid laws in England. Importantly for investors, there is probably less risk of significant future government restrictions in the UK than that outside it.’

European flash PMIs

The January flash composite eurozone PMI came in at 52.4 (consensus: 52.6), against 53.3 in December. Broken down, the manufacturing component surprised on the upside at 59.0 (consensus: 57.5), up from 58.0 in December, while services disappointed with a 51.2 reading (consensus: 52.2) and is down from 53.1 last month.

‘The Eurozone PMI data is generally consistent with economic growth despite headwinds from covid uncertainty,’ said Casali. ‘On the positive side, the manufacturing sector is getting a boost from low inventories, which in turn is driving-up production activity. Factory output is likely to remain buoyant until supply-chain issues, related to labour shortages and production bottlenecks, are resolved. On the negative side, services have been weighed down a little by recent covid restriction from the outbreak of the Omicron variant. Covid new cases have yet to peak on the continent in this latest wave, though Omicron looks less deadly than previous strains.’


About Tilney Smith & WilliamsonTilney Smith & Williamson is the UK’s leading integrated wealth management and professional services group, created by the merger of Tilney and Smith & Williamson on 1 September 2020. With £56.0 billion of assets under management (as at 30 September 2021), it ranks as the third largest UK wealth manager measured by revenues and the sixth largest professional services firm ranked by fee income. The Group currently operates through three principal brands: Tilney, Smith & Williamson and online investment service Bestinvest. It has a network of offices in 27 towns and cities across the UK, as well as the Republic of Ireland and the Channel Islands. Through its operating companies, the Group offers an extensive range of financial and professional services to individuals, family trusts, professional intermediaries, charities and businesses. It is uniquely well-placed to support clients with both their personal financial affairs and their business interests. Tilney Smith & Williamson’s personal wealth management services include financial planning, investment management and advice, online execution-only investing and personal tax advice. For businesses, its wide range of services includes assurance and accounting, business tax advice, employee benefits, forensic advice, fund administration, recovery and restructuring and transaction services. For further information please visit: www.tsandw.com

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