Speaking at a dinner in London, the manager of the CF Woodford Equity Income Fund, said the global economy’s biggest challenge is the prospect of deceleration and deflation.
“We are very cautious on the global economy. We are cautious on the European recovery and much more cautious on the US and the UK, especially regarding the likelihood of rate increases,” he said.
“The idea that rates will rise in the UK anytime soon is laughable.”
One of the reasons for this caution, Woodford said are the ongoing changes in China.
The Chinese growth engine is going into reverse, he said, “the Chinese credit bubble is bursting.”
As a result, the Chinese government will have to recapitalise the banks sector and expect lower growth going forward.
“The years ahead for China are going to be very difficult,” he said, adding that deflationary challenges are going to persist, as will negative rates. And, in this environment, the outlook for equities is and will continue to be challenging.
“Asset prices have all benefitted from the first iteration of extraordinary monetary policy. As valuations have been pushed up, so expectations have been raised that these will be met by higher earnings growth. But, in a low growth world those expectations are not sustainable,” he explained.
“And, as investors begin to realise there is more risk in markets, so those valuations will be challenged.”
He is also concerned about the sustainability of dividends within the UK market.
“We have already seen dividend cuts from a number of major dividend payers. I expect there will be further cuts to dividends. In my view, the three stocks that are paying unsustainable dividends are Shell BP and HSBC.”
However, while his macroeconomic outlook is gloomy, Woodford is not expecting a single event to bring everything crashing down, or, indeed a rerun of 2008 and he is not pessimistic about the entire market.
“There is a subset of the market that can still deliver high single digit returns over a three to five year time horizon, and it is in these stocks to which he feels the portfolio is exposed.
On a medium and long-term basis, he is even more positive, as he says within the unquoted space, there is a “tidal wave” of innovation coming down the pipe that will ”change all of our lives”.
