Markets will not be hit by a global recession or damaging deflationary environment in the near term, according to FE Alpha Manager Richard Woolnough (pictured), whose bullishness is in strong contrast to fellow star manager Neil Woodford. 
Most markets are close to recovering from the sharp falls seen at the beginning of the year but concern is still markedly higher compared to a year ago, as many warn we are in the early stages of a global recession and as gold has re-earned its status at a ‘safe haven’ thanks to its stellar gains in 2016 so far.
Performance of indices in 2016
Source: FE Analytics.
Woolnough, who is the manager of the £14.95bn M&G Optimal Income fund, and Woodford who heads up the £8.3bn CF Woodford Equity Income fund, run two of the largest portfolios in the Investment Association universe but are split on the direction of travel.
They are also seeing opposite dynamics in terms of fund flows. While CF Woodford Equity Income has seen £3.2bn flow in in the past year, M&G Optimal Income has seen £7.6bn flow out.
Source: FE Analytics
The former thinks that sentiment towards markets have become overly bearish while the latter thinks there is a strong risk of deflation. Both say these views are reflected in their portfolios.
Woolnough said: “US unemployment has gone down. We have not had a great depression. We have not had a repeat of the 1930s. Monetary and fiscal policy has worked. Core inflation does exist, inflation is not dead.”
“We are not in a deflationary world. We are not in a world of mass unemployment. We are in a good scenario, not a bad scenario. The UK economy is working fine.”
Woodford(pictured below) – on the other hand – thinks UK economic growth is heading down, even further than forecast revisions from the Office for Budget Responsibility (OBR) announced in yesterday’s Budget. 
“Global economic headwinds are intensifying and they will continue to exert a depressing effect on the performance of the economy from a growth and deflation perspective. [The OBR] is slowly adjusting its excessively bullish outlook for the economy and as a result the deficit reduction headwinds look more challenging than they did in 2015.”
“We believe the OBR is still too bullish on growth and inflation – and so there will be more revisions to deficit reduction targets to come in the years ahead. In my view, this only matters to the UK economy to the extent that it subsequently leads to a more contractionary fiscal policy, which will not be good for growth.”
These raises the threat of deflation, Woodford believes, and makes the chances of loose monetary policy more likely and idea of interest rate rises any time soon “laughable”, as he told FE Trustnet recently.
Woolnough, meanwhile argues the opposite and believes that the Bank of England must act soon so as to stave off a pick-up in inflation.
“The US and UK labour market are tight and when this happens, wages go up. It is not instantaneous, but it will result in inflation. The Bank of England need to act early to move on and head this off. They can’t wait another year as then we develop an inflation problem in the labour market,” he said.
“The things that drive recessions are increases in interest rates. The Fed still remains very light on its feet and is very, very accommodative.”
“The other thing to bear in mind is how the oil price works. It is a big driver of the economic cycle. When it goes thought the roof, the increase slows the economy down. However, the low is good for economic growth.”
The manager has recently been adding to more volatile parts of the bond market, believing credit markets are “quite cheap”. He expects they will rally when recession fears subside.
“We think spreads are attractive. Everyone thinks bonds are stable but when you move into longer-dated credit... you get big moves. We think spreads are attractive. The market starts thinking to itself the world is coming to an end, but when it realises that the world is not coming to an end we'll have a good week or two. So that is how we are positioned.”
The market is priced on for an "aggressive" level of defaults but thinks the rates will stay at a low or moderate levels, he adds.
"We think the marketplace isn’t pricing in the correct scenario. It is pricing in a lot more defaults than has historically been the case.”
Both Woodford and Woolnough have seen their funds hit by a ramp up in volatility and bearishness over the past year, but each portfolio has managed to stay ahead of their average sector peers.
Performance of funds, sectors and index over 1yr
Source: FE Analytics.
Woodford has had the view that his portfolio had to be constructed to weather a storm due a deteriorating global macroeconomic picture for some time and so the CF Woodford Equity Income fund is positioned for “more challenging economic world”, the manager says.
