3rd August 2012
Among the options are Purchasing Managers' Indices (PMIs) – surveys of companies designed to provide a snapshot of the health of a particular economy.
The economics team at Schroders give their views to Mindful Money.
Keith Wade, chief economist at Schroders:
MM: So how useful are PMIs to investors?
"PMIs can be very useful. They're very timely – the manufacturing data that came out on Wednesday was for July so it's the first bit of real information we have for what happened in the economy.
Secondly, the figures tend not to be revised at all as they tend to have a very high correlation with underlying production. The forward looking stuff, such as the data on new orders, are also very useful leading indicators."
MM: How do we account for the apparent discrepancies between the PMI figures and the GDP numbers supplied by Office for National Statistics (ONS) over the past two quarters?
"The Bank of England has often cast doubt on ONS numbers, often with reference to PMI figures. Frequently you find the ONS revising up their figures closer to those suggested by the PMIs."
MM: So what have recent PMIs been suggesting for investors?
"The latest manufacturing PMI number fell very sharply. That would suggest that the economic weakness we saw in Q2 is being carried over into the third quarter.
As far as investment strategy is concerned the PMIs are much more important than lagging GDP numbers. That said, you've got to focus on the global picture and not just on the UK. That way you can see what's happening to the global supply chain.
Azad Zangana, European economist at Schroders and formerly economist at HM Treasury:
MM: How seriously should investors treat the numbers?
"It's important to remember that not all PMIs are equal. Recently we've seen the Australian PMI become very volatile and not particularly useful, for example. The UK index hasn't been too helpful either.
The main reason that investors focus on PMIs is their timeliness. The downside is that the way these surveys are conducted means there's no weighting for the size of company purchases or the scale of the companies themselves.
There are also problems during periods of severe stress as it can lead to overreaction in the PMIs. Conversely, during a recession companies can go bust leaving the indicators upwardly biased."
MM: Where are the PMIs likely to go from here?
"When I look at the ONS official data it does seem to fit with our broader view of the weakness of the UK economy, which has not yet been showing up in the PMIs.
The kind of recovery you would normally expect to have after a recession should have been significantly stronger than we are experiencing. Due to the negative sentiment over Europe and ongoing bank deleveraging this simply hasn't happened.
At present there is a clear problem with the supply of credit, which the government is trying to correct. But the banks themselves are saying that there is a lack of demand. Either way activity is likely to be restrained."
MM: Are there any other indicators that investors should be looking at to compare against the PMIs?
"For the UK there are a number of other surveys to look at. The Confederation of British Industry (CBI) has its own manufacturing and services survey and the British Chamber of Commerce has a more thorough, though less timely, quarterly survey.
These can give you a broad survey of the health of companies. With the amount of uncertainty out there today, however, you have to be able to scrutinise company balance sheets as well."
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