British manufacturing is back in business.
Across the country, homegrown companies are seeing off years of brutal decline as they report record profits and bumper orders from across the globe.
The latest industry survey has just found that UK manufacturing is now expanding at its fastest pace of growth since records began in 1992. And this is an absolute God-send for us investors.
Because while the UK economy falters over the coming months, we may now have an opportunity to pick up a clutch of rapidly expanding stocks – right here in the UK.
Straight away I can think of three very good reasons why UK manufacturing could be one of the investment stories of 2011.
1. The City can’t ignore the satanic mills forever
Last weekend saw the start of the Six Nations rugby bonanza. And it was a good excuse to meet up with the old boys for a Guinness and a few moments to put the world to rights.
On the subject of the economy, we’d all read the news of the sudden recovery in manufacturing that morning. But not one of my eight old boys had much of anything to say about it.
And there may be a good reason for that. We’re all based in London, and (apart from myself), I don’t know a single person involved in manufacturing and exports. And I daresay the same goes for most City fund managers. London often feels far removed from the sector that’s doing well today.
But fund managers can’t ignore the manufacturing news for long. When I read the company reports, I get a strong sense that things are going very well in the heartlands of British manufacturing. In fact, the biggest check on the industry at the moment seems to be a shortage of skilled staff.
Like the rest of my London-centric mates, the City may soon start to feel the warm glow from the ‘dark satanic mills’.
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2. The collapse of the pound
Loads of things affect the economy, from weather, to interest rates, bank credit and even sporting tournaments. Some of these factors – like the snow-induced havoc around Christmas, have an immediate effect. But others take ages to make their presence felt. And one of the most important laggards is the exchange rate.
Our biggest trading partner is Europe. And the pound was struck down against the euro during the financial crisis. This has been an absolute boon for manufacturers and exporters – it’s suddenly 25% cheaper for foreign buyers to buy British.
But this has taken a while to feed into sales figures. European buyers have slowly migrated to what’s left of our manufacturing hub. It takes time to build new relationships with customers. Contracts start small and as the partnership gains trust, so contract sizes grow.
It also helps that the pound has pretty much remained weak too – way off its artificial highs, induced by our financial services racket. That means that long-term contracts are now based on a new, and lower fundamental value of the pound.
3. Now we’re down to the best of the best
Now, I don’t think manufacturing is going to be the wonder cure for our economy. During the Seventies over 30% of our economy was based on manufacturing. Yet today we’re down to only 12%.
But while this may be bad news for the economy as a whole, the manufacturers still in the game are class outfits.
Any firm that has made it through the last few decades shows resilience well worth plugging in to.
Our advantage over the German titans
And Britain has some truly great manufacturers and exporters. Many of them are at the forefront of some of the most high tech and lucrative industries today – from defence to aerospace and electronics.
Now we’re certainly not Germany – a country that’s burst back to rude health, spurred by their great manufacturing titans. But British manufacturers do have the advantage of a perennially weak currency to help bolster sales. If the UK economic recovery continues to falter – as I expect – the pound is likely to weaken further. That will only benefit the UK’s manufacturing stalwarts.
As my colleague Tom Bulford pointed out to me recently, “this country’s manufacturers have been taken for granted by the City for too long”.
The reality is that they have seen out the bad years. They’ve pared back their operations to the bone. And some are even in a position to compete with manufacturers in China – who have grown increasingly less dependable in recent years.
• This article was first published in the free investment email The Right side. Sign up to The Right Side here.
• Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do