INVESTORS face a blizzard of contradictory information. News on the economy seems inconsistent quarter by quarter and politics adds to the confusion.
Investors add their own personal observation of what seems to be happening to consumer prices and the state of trading in the high street.
It is hard to make sense of all of this, but it is far from clear that the experts are any better at the task. Are there any guides that can help sift through these mixed signals?
There may be deeper reasons for inconsistency. The UK has regional disparities as well as divergent performance between sectors. Scotland’s economy is not doing as well as the UK average, lagging behind a number of English regions as well as the prosperous South East.
Some sectors are prospering while others face disruption and a squeeze on profit margins. There is little that can be read from the current state of the British retail sector into how the economy as a whole is faring. And the impact of the devaluation of the pound has yet to be fully felt. This makes personal anecdote less helpful.
But, while investors’ own experience of the economy may mislead, it should still be possible to make some sense of the financial headlines.
Even economists now accept that it is hard to be precise about where any economy stands today. This has led to the term “nowcasting”, which recognises that understanding exactly what is currently happening in the economy is really a forecasting exercise.
The term points to the guesswork that economists must make, even though their opinions always seem to be delivered with precision. The economic numbers are often later revised materially, with seasonal adjustments particularly difficult to get right.
All this leaves considerable room for error, which could explain why investors see mixed signals. As prospects for sectors go through rapid change, with some parts of the economy being disrupted by new business models, traditional sources of information can quickly become outdated.
Sectors ranging from retailing to banking are facing problems in adapting to this change. It is harder to get good information on the parts of the economy that are happening online.
While hard economic data looks solid and has superficial precision, it can mislead. Quarterly numbers for the economy, such as GDP, are effectively fuzzy and subject to change. Surprisingly, soft data, such as surveys, can actually be a better guide to where an economy is right now. Surveys may seem ephemeral and subjective, but can in practice give more consistent trends.
Underlying business confidence, which underlies day-to-day investment decisions by companies, is typically more stable than the headlines or political comment. The value of surveys was shown in the aftermath of the Brexit vote, when business confidence held up. The same pattern might now be evident in the UK and eurozone. Fund managers often pick up signals of business confidence in company meetings and find that many businesses are much less volatile than the national growth numbers seem to be.
Politics is often the least helpful input into investment decisions, but national economic data may be a close second.
Few can time their investments to match economic cycles or even the rotations that institutional investors make between sectors. Last year’s fad for miners, for example, is rapidly fading.
But paying more attention to the patterns of business and consumer confidence, as shown in reputable surveys, can be a better guide. And, the statements companies provide about their current trading and investment plans should be carefully scrutinised.
In the US, UK and eurozone, these company reports are currently encouraging. Financial headlines should not drive investors to sell in May, but should be put alongside some more consistent economic sources.
Colin McLean is managing director of SVM Asset Management.
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