Richard Woolnough said he saw no sign of an imminent recession in the UK or US, believing it to be three years away, but said market ructions in the UK since the Brexit referendum, and in the US in the final months of 2018 was the result of the market ignoring the fundamentals of the economy and instead fixating on the most recent events, regardless of how insignificant those were.
He said: "A week and a half after the Brexit vote, people in the market were saying the economy is doing badly, but what had happened was it rained that July, so it looked worse compared to the previous July when it didn’t rain. Then in the August the sun was shining and the economy is doing well again."
"Unemployment in the UK is at a 40 year low, one reason the UK and US economies slowed a bit last year was that unemployment was so low, they were at capacity, it is harder for an economy to grow when it is at capacity, the next stage is wage growth, we have already seen it in the US, and I think it will come to the UK."
This is reflected in the investments he holds in the funds he runs, where he owned slightly riskier bonds, and bonds with a short date to maturity.
Investors own bonds with a short date to maturity if they think the main risk they face is higher inflation, rather than economic stress.
This is because higher inflation is likely to lead to higher interest rates, and higher interest rates push the price of bonds with a short date to maturity downwards.
Mr Woolnough is similarly critical of the short-term view of investors in the US.
He said: “In the final three months of 2018 the US market thought a recession was coming, and people must have thought I don’t know what I’m doing, because I wasn’t positioned for a recession, but in the first three months of this year the market has decided there won’t be a recession, and now people think I know what I am doing again.”
Over the past 10 years the M&G Optimal Income fund has returned 102 per cent, compared with 93 per cent for the average fund in the IA Sterling Strategic Bond sector in the same time period.
But over the past three years it has underperformed, returning 11.32 per cent while its sector returned 12.65 per cent.
Until last year M&G Optimal Income was the largest single fund open to financial advisers but it lost this title when M&G split it in two to create a mirror fund in Luxembourg because of Brexit.
Peter Elston, chief investment officer at multi-asset fund house Seneca, said a major concern for investors should be that while the ingredients are there for inflation to rise, economic growth remains very low.
This could lead to a scenario where inflation rises at a pace faster than does economic growth.
In such a scenario, policy makers would be reluctant to put interest rates up, as it would risk killing off the meagre level of growth in existence, but keeping rates low would prolong the inflation, creating the economic condition known as "stagflation".
David Scott, an adviser at Andrews Gwynne in Leeds had a different world view to Mr Woolnough so was investing in bond funds that were ready for prolonged deflation.
He said: “By the sounds of it, Mr Woolnough’s view hasn’t changed much since we saw him about a year ago. We think the level of debt in the world is now onerous, and will prevent inflation picking up, we prefer a bond fund that is positioned for inflation not to rise, and growth not to rise.”
Mike Coop, investment manager at Morningstar takes a cautious view on global growth and sees value in US government bonds in the current climate, as he believes the balance between the risks and the rewards on offer from those investments is worthwhile.
He takes the view that the outlook for global growth will matter more to the UK economy than Brexit.
david.thorpe@ft.com
