The veteran investor commented that a very particular trend has become evident in markets, but he is concerned about the capacity for investors to profit from it.
He said, ‘At first glance, the response from global stock markets to Donald Trump’s victory looks surprisingly benign but headline index returns mask a considerable rotation between sectors. This stems from Trump’s pledge to cut taxes and increase infrastructure spending, which has been deemed positive for the parts of the market, such as construction companies and providers of raw materials, which are expected to benefit most from the new administration’s policies.’
Woodford continued, ‘This has become known by some in markets as the ‘reflation trade’ and it has had a noticeable impact on price behaviour in the near term. We would caution against becoming too carried away by the prospect of a sustainable ‘reflation’, however. Making America great again is, in our view, going to be much more challenging than the market’s behaviour seems to imply. The US economy has been held back in recent years by structural issues, such as ageing demographics, weak productivity and excessive debt, that are just too significant to be tackled in a single political cycle.’
He added, ‘No president can have enough influence over these issues to make a material difference within four years, and we believe they will continue to exert as much of a profound deflationary impact on the US economy as they will on the UK economy and other developed economies around the world. In this sense, we believe that the market’s reaction to the election result has been based on misplaced optimism on growth and inflation.’
He added, ‘we don’t believe that this is an appropriate reaction to what has been happening in bond markets. We also remain convinced that tobacco stocks are extremely well-placed to deliver very attractive long-term returns to investors and added to both positions during the month.’
Bonds have been selling off as investors fear rising inflation.
He continued, ‘Similarly, AstraZeneca and GlaxoSmithKline weakened further. There was no fundamental justification for these share price moves. Indeed, there was incrementally positive pipeline progress from both companies during the month and solid financial results from AstraZeneca.’
Woodford continued, ‘On a more positive note, some of the portfolio’s strongest performers were its US pharmaceutical and biotechnology holdings. In part, these stocks were beneficiaries of the post-election relief rally in the US healthcare sector, but they were also helped by some positive fundamental developments.’
The FTSE 100 stock of which he has started buying is Aviva.
He commented, ‘Turning to portfolio activity, we reduced the portfolio’s exposure to non-life insurance company, Hiscox, which has performed very well over a long period of time. It is a great business, in our view, with attractive long-term growth prospects and a very strong, disciplined management team. Its shares now value these positive characteristics more appropriately, however, and so we recycled part of the position into other opportunities where valuations are a bit more appealing.’
Of Aviva he remarked, ‘These included the commencement of a new position in life insurance business, Aviva. In some respects, the investment case for Aviva is similar to that for Legal & General as both companies have good management teams and very attractive valuations, particularly in terms of yield. Aviva, although broadly similar to Legal & General, has a portfolio of different growth drivers in savings and protection markets and we deemed it attractive enough to start building a modest position.’
He concluded his comments with the remark that, ‘we also took advantage of unjustified share price weakness to add to our positions in AstraZeneca, Drax, and Stobart at what we consider to be very attractive valuations. We also added a new unquoted position in the form of Accelerated Digital Ventures (ADV), a newly-formed business that aims to provide patient capital to young British digital businesses with significant growth potential.’