The founder of Woodford Investment Management said he is more optimistic that the bearish consensus on the domestic economy, given the new possibility of a ‘soft Brexit’.
He described the volatile reaction in some financial markets following the announcement on Friday that the Conservative Party had achieved the greatest number of seats but failed to win an outright majority, resulting in a hung parliament, as a “knee-jerk ” - but said the overall the response was not one of outright panic.
“As far as financial markets are concerned, we’ve seen a modest sell-off in sterling [on Friday morning], which has, with the same knee-jerk reaction we saw after the Brexit vote, boosted the share prices of the large dollar-earning businesses that dominate the UK stock market,” the manager said.
“Meanwhile, the share prices of more domestically-exposed businesses have weakened slightly. Overall, however, the market’s response has been relatively measured, not least in the currency and bond market.”
Mr Woodford said he has not made any major changes to his investment strategy, and remains confident in the fundamentals of the companies he holds.
“I remain cautious on the outlook for the global economy, but more positive about the prospects for the domestic economy than an increasingly bearish consensus. If anything, with its implications for looser fiscal policy and a softer Brexit, the election result has made me even more optimistic about the UK economic outlook, and the portfolios are positioned to benefit from this outcome over the long term.”
He had been predicting that the Conservatives would secure a larger majority, and was just as surprised as the pollsters and politicians with how events unfolded.
However, with support from the Democratic Unionist Party (DUP), he expects the new Tory-led administration will adopt a looser fiscal strategy, borrowing more and spending more. This, he predicts, will be good for economic growth.
“I would expect, for example, the cap on public sector pay to change, as part of this fiscally-stimulative agenda,” Mr Woodford said.
This new alliance may also mean that the ‘hard Brexit’ outcome the market has most feared becomes less likely.
“In wooing an alliance partner, the Tories will have to offer some concessions and I would imagine the DUP will be keen to secure an open border with Ireland as an important part of those negotiations.
"Membership of the EU Customs Union could be seen as a minimum requirement if a deal is to be struck with the DUP and, in turn therefore, the probability of a softer Brexit outcome has risen. At the same time, the risk of a second referendum on Scottish Independence appears to have substantially diminished.”
Mr Woodford did not expect any crucial details of Brexit woud be decided until after the German elections in September, allowing time for the UK’s political dust to settle.
“In all the heat and light that accompanies an unexpected political outcome, a lot of extreme conclusions have been discussed by market and media commentators. From where I’m sitting, however, economically not a lot has changed. In fact, in some respects, the outlook for the UK economy has actually improved,” he added.
