9 January 2019
“We are consistently seeing macro data that reflects the underlying strength of the UK economy. The UK labour market continues to improve and that, more than any other single issue, is the most important determinant of the more upbeat view I continue to hold about the outlook for the domestic economy.”
— Neil Woodford
December was another volatile month for global equities. Markets continued to be buffeted by concerns about the global economic environment and the extent of valuation stretch among popular growth stocks, particularly in the technology sector. As the Brexit talks move through their final stages, the UK market was especially volatile, with rapid changes in the perceived balance of probabilities causing sharp shifts in intra-month performance.
The Bigger picture
Although the UK stock market has remained preoccupied by the ebbs and flows of the Brexit debate, the UK economy has continued to produce strong data. Towards the end of 2018, we have seen further positive numbers on wage growth and employment, backed up by more good news on inflation. With the lowest unemployment since the 1970s, strong growth in employment and hours worked, combined with the fastest real wage growth since the financial crisis, we enter 2019 with strong economic momentum in the UK.
Meanwhile, the rest of the world economy is gradually looking less robust. China is very visibly slowing, emerging economies continue to struggle with dollar strength and higher dollar borrowing costs, and Europe has slowed significantly. The weak oil price that was evident in the final months of 2018 is, from our perspective a reflection of this backdrop, with much weaker demand growth than the consensus had expected, as well as more robust supply growth.
The US economy is still visibly strong but the waning influence of fiscal stimulus, allied to the lagged effects of much tighter monetary policy, are beginning to challenge policymakers and financial markets. Bond investors appear to be pricing in a much more challenging economic environment and the correction that appears to have started in the equity market is another warning of more troubling times ahead.
Month in numbers
Decline in the S&P 500 index in December 2018, as US stocks post worst final month of the year since 1931
Increase in number of people in full-time employment in the UK in the year to end of October 2018
Annual growth in UK retail sales, November 2018 – well above consensus expectations of +2.3%
Amount of non-dilutive capital raised by Theravance Biopharma in recent debt-issue
Efficacy rate of Amphora, Evofem’s contraceptive gel, in typical use, as demonstrated in successful Phase III trial
Amount secured by Burford Capital to fund new litigation investments
Difference between the FTSE All Share index yield and the 10yr Gilt yield – UK equities now yield more relative to UK bonds than at any point since the Great Depression
China’s official Manufacturing Purchasing Managers’ Index level for December 2018, the weakest reading since February 2016 (<50 signals contraction in activity)
Key Company Events
Recent media coverage
A number of third-party commentators have analysed the prospects of our funds in ‘year ahead’ pieces published in the past few weeks. Here’s what some of them had to say…
Our strategy remains focused on avoiding the considerable risks that have built up in equity markets over the last decade of QE-fuelled exuberance, and capturing the opportunity that exists in the few parts of the market that have been left behind.
Over the course of the last two years, we have seen a very attractive investment opportunity emerging in domestically-exposed stocks, which have been increasingly out-of-favour since the UK voted to leave the European Union in June 2016. As the negotiations with Europe have progressed, uncertainty about the path of the UK’s future relationship with Europe has increased. The UK has consequently fallen heavily out of favour with global asset allocators and, within the UK stock market, a significant gap has opened up between the performance and valuation of international-facing stocks and domestically-exposed stocks. The open-ended funds have progressively increased their exposure to the latter, selectively focusing on stocks which are pricing in a bleak scenario for the UK’s future, which stands in stark contrast to the much more positive economic data that we are seeing.
Elsewhere, the Woodford Equity Income Fund and Woodford Patient Capital Trust portfolios continue to be positioned to capture an exciting long-term opportunity across a range of earlier-stage businesses exposed to the themes of healthcare innovation and disruptive technology more broadly.