M&G’s Woolnough warns pound could plummet

M&G’s Woolnough warns pound could plummet

Richard Woolnough, who manages the £23bn M&G Optimal Income fund, has revealed what he thinks will happen to the UK economy depending on the possible outcomes to the Brexit negotiations.

Mr Woolnough substantially owes his reputation as a bond fund manager to his having refused to invest in bank bonds prior to the global financial crisis.

In the years prior to the crisis he published blog posts warning of a problem with collateralised debt obligations and mortgage-backed securities.

Article continues after advert

It was the collapse in the pricing of those assets that led to the credit crunch and the subsequent global financial crisis.

Mr Woolnough said that if Brexit were not happening the UK economy would look quite similar to that of the US right now, with economic growth much stronger and bond yields much greater.

He said if the UK exits the European Union with a deal, he doesn't think much would change in terms of the outlook for UK inflation and the economy.

But he said if the UK leaves without a deal, "then the currency would act as a balancer, and there would need to be fiscal action, but the Bank of England would not be able to help."

The currency acting as a balancer means Mr Woolnough expects the value of sterling to fall dramatically, and this would have much the same effect as it did in the immediate aftermath of the Brexit vote.

He said again the economy would receive a stimulus as a result of exports becoming cheaper, while inflation would be higher for UK consumers.

Mr Woolnough’s description of a fiscal solution means the government acting to increase spending in order to generate domestic demand in the economy.

Both of those outcomes would be expected to lead to higher inflation in the UK.

Bank of England governor Mark Carney has said if there is a no deal Brexit the Bank would loosen the lending rules it places on commercial banks, with the aim of injecting £300bn into the economy by way of a stimulus.

But Mr Woolnough said a hard Brexit is "not one the Bank of England can fix."

Mr Woolnough also believes that inflation will continue to rise in the US, as the central bank of that country, the Federal Reserve, have been too slow to put interest rates up, given the prevailing conditions of low unemployment and rising wage growth.

He said interest rates usually take two years to work through an economy, and that after a period of rising rates, economic growth declines.

That would put the US economy on course for a slowdown in December 2019, he said, but he expects that the tax cuts introduced into the economy by US president Donald Trump to extend the period of US growth into 2020.

Mr Woolnough said that were investors to look at his bond portfolio, "they would think I am doing the things you do when you are cautious, when you think the economy is in bad shape. But actually, while I have those assets, the reason is, I don't think investors are being paid enough to justify buying riskier assets.