Robin Geffen: UK investors positioned for strong growth are ‘mistaken’

Geffen Robin Neptune 2014

Neptune Investment Management chief executive Robin Geffen says investors predicting strong UK growth and strong sterling for the remainder of 2017 are mistaken as he argues the Bank of England is more likely to lower rather than raise rates.

Geffen is pessimistic on UK housebuilders and banks, although the £208.4m Income fund, which is deputy managed by George Boyd-Bowman, holds HSBC due to its exposure to Asia.

Geffen’s bearishness contrasts with Neil Woodford, who announced in the lead up to the general election that he was taking a contrarian bet on the UK economy, including initiating positions in a number of housebuilders as well as Lloyds Banking Group.

But Geffen warns: “Anyone whose portfolio is predicated on strong UK growth and strong sterling, in our view, is mistaken. We are positioned for a weak UK economy and for sterling to weaken from here.”

In H1 the fund sold out of WPP and Greene King and added to ExxonMobil and Sage Group and initiated positions in Glencore, Croda and Smiths Group.

According to Morningstar data, the fund has returned 22.4 per cent in the one year to 30 June, compared to 19.4 per cent in the IA UK Equity Income sector and 18.1 per cent in the FTSE All Share.

However, Geffen admits the fund underperformed the All Share in the first quarter by “about half a per cent”.

“We’ve seen bounces, a bit of mean reversion. We’ve seen bounces in domestic cyclicals and small and mid-cap stocks that are very dependent on the UK economy.

“We’ve seen overconfidence in sterling and we find it very hard to believe there’s a 50 per cent chance of a rate rise this year. I would say a rate rise is as likely as a rate reduction. In fact a rate reduction is more likely due to concerns over the direction of the UK economy.”

Inflation and uncertainty

Neptune chief economist and CIO James Dowey expects the sharply slowing UK economy to dominate the investment landscape for the rest of the year “as opposed to a dominant role for politics that we’ve seen in recent months”.

A squeeze on consumers and uncertainty hitting business investment will be behind this slowdown, Dowey argues.

“There’s a significant gap now between prices on the shelf and wages in the pocket,” Dowey says.

Inflation hit 2.9 per cent in the June ONS figures, while wages fell 1.5 per cent.

In addition, the Bank of England tightened credit conditions last week, which has been an important driver of household spending over the last nine months.

“Conditions for the consumer are getting tougher from here and we think it will be very, very difficult for them to drive growth forward for the rest of the year as it has done for the last nine months.”

When it comes to business investment, Dowey points to a 75 per cent drop in investment in the UK car industry since 2015, which he attributes to uncertainty around the country’s economic relationships and trade.

“That’s not going to fix itself quickly with politics as it is,” Dowey says.

Regarding the market pricing in a 50 per cent chance of a rate rise by the end of the year, Dowey says this is “very unlikely” due to inflation being driven by import prices rather than domestic conditions.

“We expect the Bank of England to look through this inflationary period just as it did in 2011 and 2012 when import prices pushed inflation all the way up to 5.2 per cent. As growth slows further over the course of this year, if we’re right about that, then we expect this speculation about rate hikes to dissipate so we expect downward pressure on sterling to come through later in the year.”