Neil Woodford has said that the “stress” and contagion effects from emerging market currencies have validated his cautious stance on the global economy and bullish take on the UK market.
In his August round-up, the heavyweight UK manager said weakness in the Turkish lira, Chinese renminbi and the Argentine peso, made worse by a stronger dollar, reflect “the real economic stresses building in these economies” and have started to influence stock market sentiment “more profoundly”. “I expect that to continue,” he said.
The “one bright spot” in Woodford’s pessimistic worldview is the UK domestic economy which he said, “continues to buck the trend and defy expectations of a slowdown”.
“In the UK, the labour market is strong, we have record job vacancies, investment spending is growing, government finances are improving and we’re seeing growth in bank lending – the recent numbers reflect a UK economy that is performing much better than was forecast.”
Woodford’s winners and market’s losers
He added this economic stress was revealing the strength of his stock picks and the weakness of companies outside the funds.
“Weakness from the share prices of companies not held in the Woodford portfolios is becoming increasingly evident, as signs of economic stress continue to build, particularly in emerging markets,” he said. “We expect this to continue and remain very confident that the funds are well-positioned to deliver attractive long-term returns, despite the more challenging global economic environment that we foresee.”
By contrast, Woodford said the companies in his portfolio continue to perform positively “with one or two exceptions”. However he said that this was not yet being reflected in the share price.
He said this was particularly true of domestically-focused holdings like housebuilder Barratt Development, the second largest holding in the Woodford UK Equity Income fund, and online estate agent Purplebricks, both of which have taken a hit to their share price in 2018.
Other top 10 holdings like Burford Capital and Provident Financial, one of his weakest performers last year, have fared better.
Better performance
The star manager has been one of the UK’s biggest bulls despite signs of a domestic slowdown in the first quarter.
Earlier this year he declared the UK economy could be the fastest growing OECD nation by the end of 2018.
Since the Brexit vote, Woodford has also taken a shine to companies from domestically focused sectors like the housebuilders and banks, ditching more defensive stocks like British American Tobacco and pharma giant GSK.
Woodford’s flagship UK Equity Income fund and Patient Capital Trust have lagged peers after suffering major stock-specific setbacks. Both vehicles are fourth quartile over one and three years.
However, Woodford’s funds have seen a bit of a turnaround in recent months. Woodford Patient Capital Trust has returned 8.9% against the IT UK All Companies sector’s 0.4% over three months, sliding into first quartile. His £5.8bn UK equity income fund has outperformed the IA UK All Companies sector but is still in negative territory with returns of -0.6%.
