The recent falls in Chinese stock markets look set to “spill over” into the real economy and put global markets at risk, according to star fund manager Neil Woodford, who is expecting a wholly unsupportive macro environment for equities.
Headlines have been filled in recent weeks by worries over Greece’s ongoing deadlock with its creditors and a heightened expectation of venturing into the uncharted territory of a eurozone exit.
More recently, state controls in China in the trading of shares as well as curbs against short selling have been implemented as an attempt to bolster the country’s rapidly falling stock markets and have started to make some investors concerned.
China has seen a huge fall in confidence from its domestic investors in recent months while the Greek stock market has been falling for about six months.
Performance of indices in 2015
Woodford, who manages the £6.1bn CF Woodford Equity Income fund, says the macroeconomic background is fast becoming frailer and is now broadly unsupportive of equity markets because of these two seemingly unconnected events.
“We continue to expect volatility from here as this Greek tragedy reaches its final scenes. Thus far, the situation has evolved broadly as we expected it to, albeit timings have been (and remain) difficult to predict,” he said.
“Financial markets have been consistently too complacent about the prospect of a mutually beneficial outcome to this saga, whereas we have for some time viewed current events as ultimately inevitable.”
“This is one of many reasons why we have calibrated a cautious investment strategy, with the expectation of a challenging future for the global economy.”
“Recent events do nothing to change this – indeed, they serve to vindicate this. So, although the next few months may see considerable volatility in financial markets, our confidence in the longer-term outlook for the portfolios we manage remains unmoved by the unfolding crisis in Greece.”
However, Woodford says it plays to an underlying theme in his portfolio of expecting little support from the macro backdrop.
“We built the portfolio expecting very little help from the macro economy – particular from Europe – and that continues to be the theme. We don’t believe in cyclical economic recovery. We believe that extraordinary monetary policy will continue and low interest rates will remain and the political risk that overlays that only contributes to that cautious view,” the manager said.
In a departure from his former preference to hold mostly large cap stocks while manager of the now £13.3bn Invesco Perpetual High Income and £6.6bn Invesco Perpetual Income funds, Woodford has constructed a portfolio in his new fund that mixes the likes of Imperial Tobacco and GlaxoSmithKline with holdings in the FTSE 250 and AIM index as well as stakes in some unquoted companies.
His portfolio is considerably less concentrated, with the majority of holdings small positions in smaller companies.
This has been a boon to overall performance, as recent FE Trustnet article found, with Woodford’s best performing stocks coming from across the market cap spectrum.
According to FE Analytics, the fund has returned 17.1 per cent since it was launched in June 2014, the highest return in the IA UK Equity Income sector.
Woodford’s former funds – now managed by fellow FE Alpha Manager and Invesco Perpetual head of equities Mark Barnett – also performed well but did not beat CF Woodford Equity Income.
Performance funds, sector and index since launch
CF Woodford Equity Income has also performed well since markets began to absorb worries over Greece and China at the beginning of June. It is ahead of the sector and index as well as Barnett’s two titan funds, which are mostly in FTSE 100 names.
Performance funds, sector and index since 1 June 2015
Woodford says he has been anxious about the events in both Greece and China but he adds that the China situation is worse for the global economy and more important than what is happening in Greece.
He believes this is because it undermines the government’s plan to convert China’s economic model from an export-led economy to a consumer-led economy.
“It has the potential to shatter consumer confidence. Too many people have been sucked into a casino market. They borrowed money at the margin … and everything looks good when it is going up rapidly. When the bubble bursts it is very frustrating,” he explained.
“It looks initially like a market contained event but quite quickly it can spill over in to the real economy. This is what we think may well happen. The political risk that overlays now only contributes to that cautious view.”
