2 November 2018
“The Budget statement confirmed many of the economic assumptions that I have embedded in the portfolio strategy. These assumptions have been based on the facts as I have observed them. It was, consequently, very reassuring and especially so for the housebuilders.”
— Neil Woodford
October was a brutal month for risk assets, with all regional stock markets suffering heavy intra-month falls, before staging a rally in the last few days. As is often the case in market corrections, it’s difficult to pinpoint any one trigger for market declines, but they broadly coincided with signs of weaker global economic activity and a decisive move higher in 10-year US Treasury yields.
Meanwhile, there is increasing evidence that the consensus is beginning to reflect the reality of the global economic predicament. The International Monetary Fund (IMF) significantly downgraded its global growth expectation for 2018, while simultaneously upgrading its UK forecast.
The Bigger picture
Really good inflation numbers today in the UK – below expectations at 2.4%, which compares favourably with yesterday’s wage growth number which was above expectations at 3.1%. Good news for domestic consumption and UK economy more broadly.— Woodford (@woodfordfunds) October 17, 2018
Key Company Events
The Budget earlier this week underlined the improving fundamentals of the UK economy. Tellingly, our famously cautious Chancellor said very little about Brexit, focusing instead on the end of austerity whilst maintaining fiscal prudence.
The Chancellor has taken advantage of the considerable additional spending room granted by the Office for Budget Responsibility (OBR), which is now belatedly acknowledging that the UK economy is performing significantly better than it had forecast. The OBR is now forecasting UK GDP growth of 1.6% (up from its previous forecast of 1.3%) this year, and it has also revised growth expectations upwards for future years.
These higher forecasts are rooted in some themes that regular readers will be familiar with. More people in work, earning and spending more money and now with the additional tailwind of real growth in government spending.
Elsewhere, in the Budget, we saw announcements that we believe are positive for the housing market. The cap on Stamp Duty exemptions for first-time buyers in shared ownership schemes (Help-to-Buy transactions) is to increase from £300,000 to £500,000. Meanwhile, the Help-to-Buy scheme will be extended to March 2023 with new regional price caps.
To conclude, this was an astute political Budget and one which underlined the significant economic improvement that is unfolding here in the UK. It confirmed many of the assumptions that Neil has embedded in the portfolio strategy. The UK economy is growing strongly, it is improving as we continue through 2018 and, in our view, will yet again surprise consensus in 2019.
Macroeconomic data from around the world is increasingly supportive of our investment strategy. We believe the recent volatility and, indeed, the market behaviour that we have seen since early summer, reflects the start of something, not the end. The benefits of our strategic positioning are yet to meaningfully accrue to the portfolio, but we remain utterly convinced that they will.
As ever, our focus remains on the long-term and, from that perspective, we maintain our view that the investment strategy is very appropriate for the prevailing economic and market conditions. This statement applies as much to what we do own in the portfolios, as it does to what we do not own.