UKSep 25 2017

Woodford clashes with FCA and Bank on household debt fears

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Woodford clashes with FCA and Bank on household debt fears

Fund manager Neil Woodford has said worries about the level of consumer debt in the UK economy are “overdone”, despite warnings from the Bank of England and the Financial Conduct Authority.

Bank of England policymaker Alex Brazier warned in July that rising levels of household debt could pose a danger to the economy, as lending conditions become too lax and rapidly rising consumer debt outpaces wage growth.

He flagged three main risks: more relaxed terms and conditions on some loans and credit cards, high loan-to-income mortgage lending, and the fast growth of auto finance which has meant some lenders are now exposed to prices in the second-hand car market.   

Echoing the Bank's concerns, last week in comments to a national newspaper FCA chief Andrew Bailey said consumer debt levels are at the top of the watchdog's “to do” list for  2018.

"No one body might solve it on their own," he said, adding, "it needs government involvement".

The FCA confirmed to FTAdviser this is the regulator's stance.

But Mr Woodford, whose view UK shares most exposed to the UK economy are better value than the parts of the market exposed to the global economy has been costly for investors in his funds over the past year, has said the concerns of the Bank and the FCA are overblown.

"Figures released by the Office for National Statistics last month suggest that UK household savings have been running at 8-10 per cent in recent years, compared to previous estimates which fell to c. 5 per cent last year," he said.

"Admittedly, the UK savings ratio has still been on a downward trend, as one might expect in a period when the value of other parts of the balance sheet, such as equities and, most households’ primary asset, the house itself, has been rising.

"The pace of the decline in savings, however, has been much less sharp than previously estimated.”

He added: “Although the rate of debt growth has increased as the banking sector has rehabilitated itself, it remains modest compared to the rates of growth seen in the early years of the new millennium.

"Further evidence, as far as we’re concerned, to suggest that worries about consumer debt are overdone.”

The flagship £8.8bn Woodford Equity Income Fund has lost 3.3 per cent in the past twelve months, compared with a gain of 6 per cent for the market as a whole.   

The fund manager said stocks in sectors such as mining are performing well because of inflated expectations for the Chinese economy, and a very cautious outlook for the UK economy.

However he said the data actually is supportive of his favourable views on the UK, including better-than-expected retail sales numbers, which he said suggests a modest improvement in economic activity in recent months which, alongside renewed growth in money supply, "bodes well for UK GDP growth in the second half of 2017 and beyond”.

Ben Brettell, senior economist at Hargreaves Lansdown, said of the Bank's recent warning on consumer debt that the most obvious way of making debt less attractive is to raise interest rates.

"But given this would also make many existing loans harder to service, potentially tipping households into defaulting on repayments, the Bank has been using other methods of restrict new lending, such as increasing the amount of capital lenders must hold.”

Such restrictions would reduce the level of borrowing in the economy.

Central to Mr Woodford’s case for the UK economy is that the banking system has been repaired for the first time since the financial crisis, increasing lending in the economy and facilitating economic growth.

Philip Milton, who runs Philip J Milton and Co, an adviser firm in Devon, said he also has a positive view of the UK economy.

“The ‘uncertainty’ dogging us at the moment is actually far less than I had anticipated – the only thing almost to the penny is the weakness of sterling but I should not have been surprised to have seen the economy slip, unemployment and employment fall and tax revenues alongside that and the migration statistics already pointing to reductions in overall population numbers not ‘reduced increases’.  

"On the currency front too, it is not only sterling but actually the Euro has been remarkably strong and too strong so its progress has increased Sterling’s decline.

"That said, in my view it is a temporary aberration and we are gently but decidedly pulling-back overseas’ assets and buying more British ones for clients – banking the excellent additional profit since last June on currency grounds and buying cheap home-based assets.”

More than 8.3m adults in the UK are struggling under the burden of debt - a higher proportion of the population than in 2016, according to figures from the Money Advice Service.

Its data revealed 15.9 per cent of the UK population is living with a debt problem, up from 15.4 per cent in 2016. 

David.Thorpe@ft.com