Although it became somewhat out-of-fashion to champion UK manufacturing in the pre-credit crunch years, I believe that it is crucial to the future success of the UK economy.
Certainly, the UK economy is becoming more knowledge-based and has moved on a considerable amount from the days of heavy, labour-intensive manufacturing. Indeed, UK manufacturing is today more focused on highly specialised pursuits and the techniques used are often cutting-edge.
However, despite this change, the state of UK manufacturing acts as a fairly reliable bellweather as to the health of the whole economy. With this in mind, I was encouraged to read that the UK purchasing manager index (PMI) is now at its highest level in 2.5 years, being 57.2.
This is a key level, not only because it is above the crucial 50 mark that separates expansion from contraction, but also because it represents the fastest increase in almost 20 years, with July’s figure being 54.8. It is also the fifth consecutive month that manufacturing activity has increased.
This positive news got me thinking as to how I, as a private investor, could benefit from what seems to be some positive momentum in the UK economy.
Indeed, with Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) accounting for roughly £1 in every £8 spent in the UK retail sector, there seems to be no better place to start.
Of course, Tesco has not found the past few years particularly easy or straightforward. Its new CEO, Philip Clarke, has yet to really make his mark on the business and it has felt at times that he is keeping things ticking over from the Sir Terry Leahy days, rather than making the job his own.
However, with a joint venture in China and the sale of Fresh & Easy in the US recently announced, Philip Clarke seems to now be running Tesco in his own way. Such moves mean that management is able to focus more time and energy on turning around the company’s fortunes in the UK, which remains its biggest market by some distance.
So, the turnaround strategy seems to be gathering pace and, with shares trading on a price-to-earnings (P/E) ratio of just 10.3 they seem to be rather cheap when compared to the FTSE 100 on 15 and the food & drug retailers sector on 11.2.
Throw in a yield of 4% and Tesco looks to be well-worth buying.