M&G's Woolnough rules out market correction in 2018

M&G's Woolnough rules out market correction in 2018

Richard Woolnough, who runs the £21.4bn M&G Optimal Income fund, said there is little prospect of a recession or sharp decline in markets next year.

Mr Woolnough's reputation has to a large extent being forged by his prescience ahead of the global financial crisis, when he avoided bank bonds.

Over the 10 years to 6 December, the fund has returned 108 per cent, compared to 57 per cent for the average fund in the IA Sterling Corporate Bond sector in the same time period.

Mr Woolnough said markets are in a highly unusual position where returns are high and volatility is low.

The global economy is also experiencing a situation where economic growth is rising, while inflation hasn’t moved upwards.

He said, in normal circumstances, neither of those scenarios would be viewed as sustainable.

This is because higher levels of economic growth should lead to inflation as the volume of money in the economy increases at a faster rate than supply of services increases.

The higher inflation would be expected to lead to central banks putting interest rates up in order to encourage saving over spending, and therefore slow the rate of inflation and borrowing.

Those monetary policy actions would be expected to be bad for equities, and to lead to volatility.

But Mr Woolnough said he thinks it will be different this time.

He said: “Many investors have been thinking about whether markets, especially in the US, are also close to reaching the end of what has been a particularly protracted cycle.

"There is evidence that cycles have been getting longer, and in my view, traditional thinking on the subject may not fit with today’s post-financial crisis world.

"The two main reasons why cycles have traditionally ended – energy price spikes and bank leverage – have become less significant over the last 10 years.

"Today, the energy component of GDP is lower, while banks’ ability to leverage has been substantially reined in by greater regulation."

The level of bank leverage matters because it is sharp increases in bank lending that lead to increased economic growth and inflation in the short-term, and a later quest by banks to reduce lending that spirals into economic contraction, which is bad for most investments.

Mr Woolnough's view is that banks are not able to lend to the same extent as in the past, meaning the usual cycle of a sharp expansion in bank lending leading to rapid economic growth and inflation won’t happen, and nor will the subsequent collapse in bank lending.   

The fund manager added that sharp rises in the oil price has historically spoiled economic growth, as it causes a rapid increase in inflation and sharp decline in demand for goods and services, creating recession and carnage in the stock market.

But he said oil has come to play a much less important role in the global economy, as energy efficiency and alternative sources of energy grow market share.