December roundup

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Mitchell Fraser-Jones 9 January 2019 Est. reading: 5 min read

December Roundup

Mitchell Fraser-Jones
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.

Read more of our latest ‘Bigger picture’ thoughts here

Month in numbers

-9.2%

Decline in the S&P 500 index in December 2018, as US stocks post worst final month of the year since 1931

428,000

Increase in number of people in full-time employment in the UK in the year to end of October 2018

+3.8%

Annual growth in UK retail sales, November 2018 – well above consensus expectations of +2.3%

$250m

Amount of non-dilutive capital raised by Theravance Biopharma in recent debt-issue

86%

Efficacy rate of Amphora, Evofem’s contraceptive gel, in typical use, as demonstrated in successful Phase III trial

$1.6bn

Amount secured by Burford Capital to fund new litigation investments

3.5%

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

49.4

China’s official Manufacturing Purchasing Managers’ Index level for December 2018, the weakest reading since February 2016 (<50 signals contraction in activity)

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…

 

Why I’m tipping Neil Woodford to fight back in 2019

Waiting with Woodford

Conclusion

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.

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What are the risks?

  • The value of investments and any income from them may go down as well as up, so you may get back less than you invested
  • Past performance cannot be relied upon as a guide to future performance
  • The annual management charge is charged to capital, so the income of the funds may be higher but capital growth may be restricted or capital may be eroded
  • The funds may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits – some of these security types could increase the funds’ volatility and increase the level of indirect charges to which the funds are exposed
  • The funds and trust may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the sterling value of these investments and the income from them, to fluctuate
  • The LF Woodford Income Focus Fund will be invested in a concentrated portfolio of securities – the fund is not restricted by reference to any geographical region, sector or market capitalisation
  • The LF Woodford Equity Income Fund and the Woodford Patient Capital Trust may invest in unquoted securities, which may be less liquid and more difficult to value, because they are generally not publicly traded – the lack of an open market may also make it more difficult to establish fair value
  • The price of shares in the Woodford Patient Capital Trust is determined by market supply and demand, and this may be different to the net asset value of the trust. This means the price may be volatile in response to changes in demand
  • Long-term outcomes are more binary – extremely attractive rewards for success but some businesses will inevitably fail to fulfil their potential and this may expose investors to the risk of capital losses
  • Young businesses have a different risk profile to mature blue-chip companies – risks are much more stock-specific, which implies a lower correlation with equity markets and the wider economy – it can take years for young businesses to fulfil their potential, this investment requires patience

Important information

Before investing, you should read the Key Investor Information Document (KIID) for the fund – or Key Information Document (KID) for the trust – and the Prospectus which, along with our terms and conditions, can be obtained from the downloads page or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

The Woodford Patient Capital Trust currently intends to conduct its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the FCA’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the FCA’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

 

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

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