4 February 2019
“The UK economy entered 2019 with positive momentum and looks well placed to continue to strengthen as the year progresses. This will, in my view, contrast significantly with almost every other large developed economy, including China, where recent data has been worryingly weak. In Europe, the disappointing data we saw in the second half of 2018 is getting worse, Japan is not growing at all, and I believe the US economy will slow as the year progresses. The UK’s economic performance in 2019 will, in that context, stand out from most of its peers.”
— Neil Woodford
Equity markets enjoyed a robust start to the year, rebounding from December’s declines. Global macroeconomic data appeared to resonate more with the market behaviour at the end of last year, however, with weakness particularly evident in China and Europe, and growing concerns about the outlook for the US economy.
Towards the end of the month, the Federal Reserve (Fed) responded to the deteriorating economic environment by signalling that it is pretty much done with interest rate hikes for now and intends to be more flexible about the pace of its balance sheet ‘normalisation’ through the process of quantitative tightening (QT).
Although this evolution of Fed policy may have contributed to the near-term rally, the implications of a deteriorating backdrop are not positive for most risk assets from a longer-term fundamental perspective. Indeed, we expect the US to join the rest of the world in this more challenging economic environment, with very few regional economies possessing enough internal momentum to withstand the slowdown that is already in train. The UK economy is one of these rare exceptions.
The Bigger picture
Month in numbers
Source: Bloomberg, IHS Markit, Bank of America Merrill Lynch, Southwestern University of Finance and Economics
Year-on-year increase in UK house prices – well ahead of expectations
Amount of $-denominated Chinese debt that will need to be refinanced this year
US daily oil production (in barrels) – more oil output than Saudi Arabia
UK average weekly earnings growth to November 2018 – the highest rate of pay growth since 2008
Consensus expectations for Provident Financial’s current year pre-tax profit – a 3.5% downgrade following its January trading update resulted in a 20% share price decline
Total amount of global debt outstanding, representing 230% of global GDP
Estimated number of apartments standing empty in China (that’s equivalent to almost half of the entire US housing stock)
UK unemployment rate, lowest level since 1975
Bovis Homes’ housing completions in 2018, another year of profitable growth
Key Company Events
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.