He believes that market expectations that the globe is in the grip of a sustained period of higher inflation are wrong, and that central banks may decide to cut interest rates again.
Woodford remains resolute in his view that the UK economy will perform better than expected, but that the rest of the world will perform worse than markets currently expect.
That viewpoint has prompted him to focus more of the capital in his £10 billion CF Woodford Equity Income fund into UK focused businesses, such as Lloyds Banking Group.
Woodford’s relatively positive view on the outlook for the UK economy will attract notice due to his previous prescience on economic matters.
The veteran fund manager disposed of his UK bank holdings in 2005, and warned of an impending crisis by saying that ‘the party is over for debt fuelled consumption.’
More recently, he was almost unique amongst investors in the City in his view ahead of the EU referendum ballot that a vote to leave would have minimal short-term impact on the economy or stock market, with the decline in the value of sterling likely to be ‘mildly stimulative’ for the economy in the short-term.
The drop in sterling has caused a spike in the inflation rate to 2.9 per cent, which is above the Bank of England’s 2 per cent target, but Woodford’s view is that this is likely to be temporary.
He said, ‘Following the Federal Reserve’s (The US central bank, which has been raising interest rates over the past year) second rate rise this year and more hawkish tones from other central banks, the market is now worrying about a more widespread tightening of monetary policy. There appears to be some confusion among central bankers about the causes of current levels of inflation and how long they may be expected to last. In our view, there is no evidence of sustained inflation at present. Indeed, we are still more concerned about the prospect of deflation once the current bout of temporary, commodity-price related (and, in the case of the UK, currency-related) inflation washes through the system.’
Woodford takes the view that the underperformance of UK equities in June was a consequence of the market taking the view that rates would rise or other measures to ‘tighten’ monetary policy, that is restrict inflation, would be introduced in the UK and other markets.
That view gathered some pace in the market as the Bank of England’s Monetary Policy Committee (MPC), which sets UK interest rates, has three members who recently voted to raise rates.
Woodford doesn’t see this as a likely outcome for investors to be concerned with.
He said, ‘The ultra-low interest rates that have been in place for so long now have failed to take inflation sustainably back to the 2 per cent rate targeted by policymakers. This suggests that, if anything, even lower rates may be needed to deliver monetary policymakers’ objectives. Nevertheless, the mixed messages emanating from the central banks have prompted more volatile conditions for equity markets.’
Woodford’s view on the temporary nature of the present bout of UK inflation is actually shares by Bank of England governor Mark Carney. The official inflation report issued by the central bank opined that inflation would peak at around the current level in the last months of this year, then fall back to closer to the 2 per cent target.
It is also worth noting that, in the immediate aftermath of the EU referendum vote, the Bank of England cut interest rates, an action that is designed to be inflationary.
The consensus view of the market is that June’s inflation rate, when it is released next month, will be 2.9 per cent, unchanged from the number in July. Ipek Ozkardeskeya analyst at London Capital, takes the view that a number higher than this would send the pound soaring as the market would again revise its expectations of when UK interest rates might rise.
The CF Woodford UK Equity Income fund has returned 36 per cent over the past three years, compared with 25 per cent for the average fund in the IA UK Equity Income sector in the same time period.