October roundup

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Mitchell Fraser-Jones 2 November 2018 Est. reading: 5 min read

October Roundup

Mitchell Fraser-Jones
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

Read more of our latest ‘Bigger picture’ thoughts here

$250m The Monthin numbers Amount of equity raised by BurfordCapital to “continue to grow andexpand the business” 600,000 Approximate number of annual propertytransaction in Germany, Purplebricks’ latestinternational territory £170-190m New guidance for this year’s profit before taxfrom Crest Nicholson (forecasts werepreviously at c. £200m) 2.4% UK inflation rate came inbelow expectations forSeptember 3.1% UK wage growth data was aboveexpectations 6.5% China GDP growth for the year to 30September 2018 – below expectations andthe lowest rate of Chinese economic growthsince 2009 -5.1% Decline in the FTSE 100 indexlevel over the month 1.6% Latest UK GDP growth forecast fromthe Office for Budget Responsibility(OBR) – revised up from 1.3% in theBudget 2023 The Government is extending itsHelp-to-Buy scheme a further twoyears to March 2023 – positive for theUK housing market 0.2% Eurozone GDP growth in Q3 2018, wellbelow expectations and losingmomentum £13bn Chancellor Hammond’s Budget windfall,as OBR revises public sector netborrowing forecasts down by the largestamount since the measure wasintroduced in 1982 Source: Bloomberg, Woodford. Past performancecannot be relied upon as a guide to futureperformance. £50m Investment by US healthcare pioneer, Amgen,in Oxford Nanopore $250m The monthin numbers Amount of equity raised by BurfordCapital to “continue to grow andexpand the business” 600,000 Approximate number of annual property transaction in Germany, Purplebricks’ latest international territory £170-190m New guidance for this year’s profit before taxfrom Crest Nicholson (forecasts werepreviously at c. £200m) 3.1% UK wage growth data was above expectations 2.4% UK inflation rate came inbelow expectations forSeptember 6.5% China GDP growth for the year to 30September 2018 – below expectations andthe lowest rate of Chinese economic growthsince 2009 -5.1% Decline in the FTSE 100 indexlevel over the month 1.6% Latest UK GDP growth forecast fromthe Office for Budget Responsibility(OBR) – revised up from 1.3% in theBudget 2023 The Government is extending itsHelp-to-Buy scheme a further twoyears to March 2023 – positive for theUK housing market 0.2% Eurozone GDP growth in Q3 2018, wellbelow expectations andlosing momentum £13bn Chancellor Hammond’s Budget windfall,as OBR revises public sector netborrowing forecasts down by the largestamount since the measure wasintroduced in 1982 Source: Bloomberg, Woodford. Past performance cannot be relied upon as a guide to futureperformance. £50m Investment by US healthcare pioneer, Amgen,in Oxford Nanopore

Budget 2018

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.

Conclusion

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.

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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.

You should note that capital is at risk with these investments and you may get back less than you invested. The value of the fund or trust as well as any income paid will fluctuate which may partly be the result of exchange rate changes.

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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.

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. 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 Woodford Patient Capital Trust investors to the risk of capital losses. As it can take years for young businesses to fulfil their potential, this investment requires patience.

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.

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.

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