InvestmentsNov 2 2018

Woodford says market turbulence reflects 'reality'

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Woodford says market turbulence reflects 'reality'

The sharp falls which hit most equity markets in October were the result of the consensus catching up with the reality on the health of the global economy, Neil Woodford has said.

Despite period of torrid performance over the past year or so, Mr Woodford has enjoyed better returns than many of his peers in recent months, with his flagship Woodford Equity Income fund among the top 25 per cent of performers in the IA UK All Companies sector over the past three months.

He has long felt that the global economy is in worse health than the market was reflecting while the UK was in better health.

Over the past month the MSCI UK Index sharply outperformed the MSCI All Country Index, with the former returning 1.75 per cent, compared with 0.6 per cent for the latter.

Mr Woodford said the International Monetary Fund had recently cut its forecasts for global growth, while upgrading the outlook for UK growth.

He said: "October was a brutal month for risk assets, with all regional stock markets suffering heavy intra-month falls, before staging a rally in the last few days.

"As is often the case in market corrections, it’s difficult to pinpoint any one trigger for market declines, but they broadly coincided with signs of weaker global economic activity and a decisive move higher in 10-year US Treasury yields.

"Meanwhile, there is increasing evidence that the consensus is beginning to reflect the reality of the global economic predicament. The International Monetary Fund significantly downgraded its global growth expectation for 2018, while simultaneously upgrading its UK forecast."

Mr Woodford has long been skeptical about the potential impact of Brexit on the UK economy, with his firm recently comparing fears about the UK’s exit to the fears which surrounded the millennium bug at the start of the century.

But a long period of underperformance has seen Woodford Equity Income half in size from £10.7bn in assets last summer to £5.1bn now.

Over the past year Woodford Equity Income has lost 12.1 per cent while the IA UK All Companies sector lost 3.1 per cent. Over three years the fund lost 6.4 per cent while its sector gained 21.1 per cent.

Anthony Rayner, who jointly runs four multi-asset funds at Miton, said higher interest rates across the world were creating a "new era" for markets.

He noted that more defensive assets had performed better since June and said: "In terms of slower growth, economically sensitive businesses have been underperforming more defensive businesses since the beginning of June this year.

"More specifically, since June, materials, financials and industrials are the worst performers, while healthcare, utilities and consumer staples are the best performers, and are the only three sectors in positive territory.

"This feels like something more than a whimsical sector rotation, due to its persistency, in terms of duration, and that it continued during both rising markets and through the recent sell-off, and its scale.

"This suggests markets are worrying about growth and is consistent with evidence of a slowing US housing market and slowing US money supply growth, while the global PMI manufacturing survey has been moving consistently lower since April."

Guy Stephens, technical investment director at wealth manager Rowan Dartington, said: "The question is whether this is a time to buy the dips or are we in for more serious falls? Unsurprisingly the crystal ball is clouded.

"None of the factors at play here are new, and interest rates remain low as is inflation with the US perhaps being an exception. Forward looking economic indicators for most countries are in positive territory although they have been weakening.

"Asia and emerging markets have taken the biggest hits, but on a valuation basis look increasingly attractive. In a similar way, we may see stocks which have been out of favour becoming popular again, a boost for value investors.

"After a long period of strong market growth, it’s normal for consolidation to happen. Although it’s never comfortable, we think this is what we’re seeing. Our expectation is for more volatility, and potentially more falls, but not a bear market. Consequently, we think buying the dips may prove a good strategy, but catching the bottom is nigh on impossible."

david.thorpe@ft.com