Expect it to be worse, says Woodford


The recession in Britain in 2009 could be much worse than the government has predicted, Neil Woodford, the head of investment at Invesco Perpetual, has warned investors.

In a conference call for clients, Woodford forecast that the recession would extend throughout next year and that the extent of the contraction in the economy could exceed that of the 1990s. “The government’s estimate of a 1% contraction seems much too optimistic,” he said.

As banks and consumers continue the deleveraging process, economic recovery next year will be weak, Woodford said.

“The circumstances are not in place for a V-shaped recovery in 2010. With these headwinds continuing, we believe recovery will be anaemic. The fall in sterling will benefit the export sector but it is not significant enough to turn the whole economy as it did in the 1990s.”

Woodford predicts that the economy will trough in the middle of next year and the first two quarters will be especially tough. Unemployment in Britain and America would rise, he said, while house prices could fall another 20% from today’s levels before they stabilised. However, Woodford said much of this negative newsflow was already priced into domestic equities.

“Having described a bearish outlook for the economy, my view of the market is that most of this is already discounted,” he said. “When I look at valuations, albeit there is still risk where there is earnings and dividend vulnerability, I am seeing a lot of value in some areas of the market.”

Woodford emphasised the importance of choosing defensive companies that will survive an environment of earnings downgrades, dividend cuts and corporate failure over the coming year. He is still not prepared to reconsider the banking sector because he is uncertain whether HBOS, Lloyds and RBS will be able to get the capital they need from the market.

Although cash levels among investors are at record levels, Woodford remains fully invested, as he has been throughout his 20-year career, with the exception of a significant proxy cash position.

He has 7% to 8% of his £7.5 billion High Income and £5.2 billion Income funds in British Energy, which is the subject of a takeover by EDF Energy. The funds will receive cash in place of their shares next month.