Woodford bearish on recovery

Invesco Perpetual’s Neil Woodford has warned that Britain and America will not see sustained economic recovery or growth for at least three to four years.

Responding to reported remarks by Ben Bernanke, the chairman of the Federal Reserve, who apparently said that a recovery could appear by 2010, Woodford said this is an overly optimistic estimate.

Speaking in a conference call for investors, the manager of the Invesco Perpetual Income and High Income funds said: “The outlook for the economy is weaker than the consensus view. [The idea that we will have] a normal growth year in 2010 is just plain wrong – it is far too optimistic.

“We are in a difficult environment globally and the UK and US are having a particularly bad time. This crisis will run for a long time – a lot longer than the second half of this year – and will encompass a prolonged adjustment,” he said.

“During benign economic conditions, debt built up on an unprecedented scale. The process of rebalancing the global and domestic economies will take many years.

“I would not expect to see sustained recovery or growth in the economy of North America for three or four years,” he added.

Woodford is broadly positive that the quantitative easing measures being taken by the government and the Bank of England to inject liquidity into the markets are a step in the right direction.

“Policy action is very important, but the wrong kind can make things much worse. The objective of policy is to insure what we are going through from getting more ugly, resulting in higher unemployment and a longer period of recovery,” he said.

Woodford called the bottom of the market last year, but it has since fallen further, with the FTSE 100 reaching a six-year low of 3,460 this month. “I wasn’t conservative enough,” the manager admitted. “I still believe we have found a bottom for the UK market and Wall Street. But that doesn’t mean share prices will go up from here.”

Woodford has been adding to his positions in defensives such as GlaxoSmithKline and AstraZeneca, tobacco stocks, and EDF.

However, it will be at least another three years before he looks at banks again. “You could argue that Royal Bank and Lloyds are economically nationalised already. If they require further capital injections, the markets won’t provide this so the taxpayer will have to. Nationalisation is the next logical option,” he said.

“At the moment [the sector] is far too opaque. We are still unearthing the full extent of the bad assets in banks’ Treasury books and loan books. We are some way through [this process] now but there is still further to go and further losses to see.

“Banks are uninvestable from an equity point of view, and I would be surprised if they were investable in the next three years,” he added.

He has also unhedged his portfolios, in the conviction that sterling will fall further. “I used to hedge currency but I took my hedges off last year as I was worried about the currency. This turned out to be the right thing to do, and I expect sterling to fall further,” he said.

Woodford remains confident in his ability to generate income in an environment of dividend cuts. He expects to see many more decisions by companies to suspend their dividends. “Dividends will become a rare commodity in the UK market,” he said.

He holds stocks that he anticipates will be able to increase their dividend, but also holds BT, which he said will probably slash its dividend this year. “BT’s dividend will probably be halved, but this has been factored into my confidence in the overall portfolio delivering dividend fund. At, probably from here, 70p per share with an 8p dividend, it looks like an attractive stock,” he said.

His funds’ move into the Investment Management Association’s (IMA) new Income & Growth sector will not affect the way Woodford runs his portfolios or generates income, he said, emphasising his total return approach.

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