During the early years of the Cold War – or perhaps it would be more accurate to say the original Cold War – the US became convinced that the Soviet Union held a significant edge in terms of bombers and missiles. Suitably alarmed, it set out to close the gap.
It was a long time before the Americans finally realised they had been mistaken. They had been duped by a combination of Soviet propaganda, their own misinterpreted intelligence and a dependence on wildly exaggerated worst-case scenarios.
A classic example: a spy-plane flight in 1956 counted all the heavy bombers on a single Soviet airbase and the total was then extrapolated to estimate the entire Soviet fleet. In reality, it pretty much was the entire Soviet fleet.
The story underlines that data is likely to be useful only if it is comprehensive and reliable. The absence of this ideal has become one of the greatest and most persistent hurdles to recognising the UK’s investment appeal.
The Office for National Statistics (ONS) plays a major role in informing government policy. In turn, government policy plays a major role in shaping many investors’ decisions. But is ONS data really an indisputable guide to the health of British businesses?
Not necessarily. Response rates for the ONS’s Labour Force Surveys have slumped to historic lows since the Covid-19 pandemic, while those for its Monthly and Annual Business Surveys have seen-sawed dramatically.
Business Insights and Conditions Surveys have had a notably tough time, with response rates of below 30% common. This hardly suggests the findings provide a spectacular window on the UK economy, less still a dazzling snapshot of the opportunities that might lurk within it.
It is important to stress that this is not a problem unique to these shores. Many governments are wrestling with insufficient data. And in the case of the US, if the figures do not fit the president’s political narrative, then they’re ridiculed anyway.
Anyone seeking to understand the attractions of UK companies might wish to look beyond official numbers and the purported ‘big picture’. In our view, particularly amid the predictable frenzy of doom-and-gloom speculation in the run-up to the autumn Budget, that means paying attention to what individual businesses’ management teams are doing. To us this presents a much better picture of what is happening in the economy.
Confidence at the individual company level
The arena of special situations, where we invest, is often perceived as the home of companies that are in dire straits. Extending this theme, ONS data might sometimes give the impression that the UK is itself just one big special situation.
In fact, these companies are better thought of as ‘ugly ducklings’. They are usually characterised by a disparity between short-term difficulties and longer-term prospects. Circumstances may have left them unloved, but they retain a capacity to turn things around.
Management teams are crucial to this transition. Their task is to offer a positive reaction to a negative event – to identify why a business may have struggled and to implement the measures needed to get it back on track.
We are seeing this across our holdings right now. Rather than anxiously waiting to discover what the chancellor will announce on 26 November, many companies are pressing ahead and getting the job done.
Take Marks & Spencer. Earlier this year it fell victim to a cyber-attack that disrupted online sales and click-and-collect services, which resulted in the theft of customer contact information and dented profits to the tune of around £300m.
Yet management has since sanctioned M&S’s largest-ever supply-chain investment – £340m for a giant distribution centre in Northamptonshire. This is central to plans to double the size of the company’s food business.
Similarly, furnishing retailer Dunelm has approved further investment to augment its presence in central London. DIY group Wickes has accelerated store openings by taking over a number of former Homebase sites.
A raft of acquisitions and mergers also indicates positive sentiment. Among others, thread manufacturer Coats, precision engineering company Hunting, investment manager Man Group and mining company Anglo American have all been busy on this front of late.
All this tells us the management teams of many businesses have considerable confidence in the future. They are investing because they know that investment helps build returns and that returns compound over time – a sound model for long-term success.
It also reminds us that, while the macro backdrop can be important, what happens at the individual company level is likely to be more revealing than any ‘big picture’ overview. Ultimately, it is very possible that these businesses have better data than policymakers can lay their hands on nowadays.
Henry Flockhart is co-manager of the Artemis UK Special Situations fund. The views expressed above should not be taken as investment advice.