Woodford on how Chinese tariffs may hit UK investors

Woodford on how Chinese tariffs may hit UK investors

Investors in many of the largest companies in the FTSE 100 are risking their wealth as economic uncertainty grips China, according to Neil Woodford.

Mr Woodford has long been sceptical of the Chinese economic model, where he said excessive debt has generated a bubble that, he says, will soon burst.

The Chinese currency and stock market have been poor performers in recent months, at least partly due to tariffs placed on its exports by the United States.

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While Mr Woodford has decried China's economic model, his fund has drastically underperformed the IA UK All Companies sector over the past 12 months, losing 9 per cent compared with a gain of 7.5 per cent for the sector.

In his latest update to investors Mr Woodford said: "Clients often ask, if we are right on China, why does this have any relevance to the Woodford funds and, in particular, the significant exposure to the UK economy?"

He added: "China’s economic outcomes will have an effect on the UK economy, but this is likely to be muted. Where China’s economic performance will be felt more dramatically, of course, is in the businesses that interact with what China buys and sells and those that have invested in the economy directly.

"This is, of course, therefore very relevant to some of the UK’s largest businesses in the oil, mining, luxury goods and financial services sectors."

He said those were sectors in which his fund has little investment, as he preferred to invest in the UK domestic economy, which he said continues to "confound consensus".

Mr Woodford said: "Growth here is accelerating and, contrary to much of the rest of the world, the UK’s economic fundamentals are improving."

The performance of Mr Woodford’s £6bn fund has improved recently, and has gained 3.9 per cent over the past six months.

Mr Woodford has a significant proportion of the fund in stocks that are exposed directly to the UK economy, including property companies Barratt Developments and New River REIT, and doorstep lender Provident Financial.

James Balfour, who runs the £1bn Aviva Investors UK Equity Income fund, said that while he cannot know what the outcome of the Brexit negotiations will be, he believed there were some companies that "have the quality to cope whatever happens".

He cited the example of Melrose, which is a private equity business, he said the shares have performed poorly as investors worry about the company’s exposure to the domestic economy.

But he said he believes the management have the quality to cope with whatever the outcome of Brexit is, but the shares have been made cheap because investors have grouped what he believes to be quality management at Melrose with lower quality businesses simply because of the UK exposure.

Andy Merricks, head of investments at Skerritt Wealth Managers, said: "Intuitively, you would not put a conviction fund manager at the top of your wish list, but when that conviction relates to belief rather than misdemeanours, it is exactly one of the characteristics that should be sought.