Going for broke

Britain has dropped out of the world’s top ten manufacturing nations.

Britain has dropped out of the world’s top ten manufacturing nations for the first time since the industrial revolution.

Britain is now placed twelfth in the 2022 rankings, down from eight the previous year. This is according to data recently compiled by manufacturing lobby group Make UK. Using data for 2022, the latest available, the UK has dropped behind Mexico, Italy, France, Russia, and Taiwan – the latter soaring on the back of semi-conductor chip manufacturing.

Manufacturing accounted for 17% of the UK economy in 1990, but now it represents only 9.4%. The sector is estimated to have contributed £217bn in output to the UK economy in 2023, supporting 2.6million jobs. The US remains the top export destination for manufactured goods, followed by Germany.

There are many reasons for the decline of UK manufacturing, from Brexit and the global pandemic to the energy crisis and the shift to renewables. However, Make UK believes the main reason is that the UK lacks a substantial, long-term industrial strategy like those adopted by many other leading nations. This would seek to focus on key areas of strength in the UK and growth sectors such as defence and aerospace, pharmaceuticals, artificial intelligence, quantum computing, floating offshore wind turbines, and small modular nuclear reactors.

Sir Keir Starmer is aiming for the UK to top G7 per-capita economic growth for two years running, having been a laggard over the last decade.

The new Labour government has announced the National Wealth Fund to support investment in infrastructure such as ports and battery gigafactories. Sir Keir is also seeking closer ties to the EU, which may help some UK manufacturers. However, some headwinds are already emerging from economic growth ambitions, with Chancellor Rachel Reeves delaying some infrastructure projects and axing a £1.3bn technology and AI fund. Perhaps the biggest challenge is declining productivity.

The Labour government has a big to-do list, but raising productivity and boosting UK manufacturing should be somewhere towards the top of the list. Given the somewhat precarious health of the nation’s finances, are we going for broke?

What have we been watching?

Markets remained volatile last week and are likely to remain highly sensitive to any official or anecdotal signs of a ‘hard landing’ in the US. Last week’s US jobless numbers came in below forecasts – phew!

However, uncertainty remains about the Japanese Yen ‘carry trade’ and whether this has been fully unwound. The scale of the ‘carry trade’ is difficult to quantify, and analysts’ estimates currently range from $500bn to $1trillion, although a few are as high as $4trillion!

The other factor in market turbulence has been the correction in US mega-tech stocks which have continued to drift lower, with the NASDAQ now 13% below its early July peak. AI chipmaker Nvidia has fallen by 25% from its peak which, given that it was at one point valued at over three-trillion dollars, has exacerbated the scale of the correction. Scepticism around the return on investment from AI capital expenditure has increased.

Nonetheless, it was the unwinding of the global ‘carry trade,’ that was the main cause of the previous week’s market meltdown. Given that Japan has kept interest rates at almost zero for a lengthy period, traders have been able to borrow cheaply in Japanese Yen to fund higher-return US market investments. The Bank of Japan’s sudden interest rate hike and the prospect of a US interest rate cut was therefore the spark that lit the fuse. ‘Carry trades’ have been used for decades and have ‘previous form.’ For example, during the Icelandic financial sector meltdown in 2007-8, where traders borrowed in yen and Swiss Francs to take advantage of high Icelandic interest rates. Like the UK LDI pension crisis in 2022 triggered by Truss-onomics, such schemes seem like a great plan until they encounter a period of extreme volatility!

The Bank of Japan sought to allay fears of the ‘carry trade’ being further unwound by suggesting there would be no further interest rate hikes while markets are unstable. However, markets are likely to experience elevated volatility while adjustments are made to Japanese and US interest rates. The Federal Reserve (Fed) is due to meet on 17^th-18^th September. Interest rate futures are suggesting a 90% chance of a 0.5% cut in September, followed by 0.25% cuts in November, December, and January.

The situation in the Middle East remains tense. President Joe Biden met with his senior national security team after several US personnel were injured in a suspected rocket attack on a US military base in Iraq. Concerns are growing about a possible Iranian retaliatory attack on Israel. Iran has vowed to overwhelm Israel’s defence systems. A regional war will benefit no one.

Ukrainian forces have undertaken a rare cross-border attack into the Kursk region of Russia. The area includes the Sudzha gas hub, which supplies natural gas from Russia to parts of the EU via Ukraine, which has continued despite the war. An average 42million cubic litres of Russian gas still flows via Ukraine daily. Russia’s invasion of Ukraine has not gone at all as Putin intended!

Chancellor Rachel Reeves, went on a charm offensive in the US to drum up investment in the UK. During this, she refused to rule out changing the way government debt is measured to help fill the ‘fiscal hole.’ Analysts estimate the Treasury could triple its fiscal headroom by excluding the impact on its finances of losses accumulated up on the Bank of England’s asset purchase facility.

In the US, following the weak ISM manufacturing data, the ISM services numbers were more encouraging, with recovery inactivity in July having a reading of 51.4.

The deputy governor of the Bank of Japan sought to allay market concern about interest rate policy. ‘As we are seeing sharp volatility in domestic and overseas financial markets, it is necessary to maintain current levels of monetary easing for the time being.’

China’s latest economic data was mixed, with exports below expectation at 7% in July but imports better than expected at 7.2%.

Brent oil rallied slightly to $79 as the situation in the Middle East remains tense.

Finally, the one true ring? Sadly, not the one forged by Sauron in the fires of Mount Doom! However, Samsung is hoping to lure fitness and health-tracking technology lovers with its newest wearable device – the Galaxy Ring. This can monitor wellness and sleep tracking. The market has been dominated by Finnish health firm, Oura and has become a fitness-tech fashion staple for celebrities such as Kim Kardashian.

Read Last Week’s Alpha Bites – Has the magic dragon ran out of puff?

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2021 Alpha Portfolio Management, All rights reserved

Full version

Site by Lookhappy

Going for broke

Alpha publications