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Woodford versus Geffen: Is the bull or bear right post the UK election?

13 June 2017

Star managers Neil Woodford and Robin Geffen outline their thoughts on the UK economy following Friday’s general election results, and how this will impact certain areas of the market.

By Lauren Mason,

Senior reporter, FE Trustnet

Little has changed since Friday’s general election from an economic perspective, according to Woodford IM’s Neil Woodford and Neptune’s Robin Geffen, although both managers have very different views in terms of how markets could react from here.

Since the shock result of a hung parliament and the likely formation of a Conservative/DUP (Democratic Unionist Party) coalition was announced, sterling has dipped slightly against the US dollar but actually rose during the first few hours of the result breaking. Meanwhile, the FTSE 100 opened on 7,449.98 on the 9 June and closed yesterday on 7,511.87.

Performance of index over 5days

Source: Google Finance

This would suggest that markets have adopted a very sanguine approach to the news, despite the heightened levels of uncertainty in the UK from a political perspective.

FE Alpha Manager Woodford, who runs the £10.1bn CF Woodford Equity Income fund, wrote in his latest blog post: “In all the heat and light that accompanies an unexpected political outcome, a lot of extreme conclusions have been discussed by market and media commentators.

“From where I’m sitting, however, economically not a lot has changed. In fact, in some respects, the outlook for the UK economy has actually improved.”

Given that prime minister Theresa May did not achieve the majority she had hoped for, the manager said the new Tory-led administration is more likely to adopt a looser fiscal strategy through increased borrowing and spending. He believes this will improve the outcome for UK economic growth. Another result of this increased stimulus, according to Woodford, would be for the cap on public sector pay to change.

In contrast, Geffen – who heads up the Neptune Income fund, believes UK economic growth is heading towards a downwards trajectory. This is a view the manager and his team held long before the election results.

“One of the things I would really want to reiterate is that this election changes nothing in terms of the imperatives of Brexit,” the manager explained.

“But most importantly, the UK economy is slowing down dramatically, house prices are coming down, our view on growth is that it will be 0.5 per cent against a consensus of 1.8 per cent, wages aren’t growing, people have increased their spending through credit and the banks simply aren’t stepping up now to accommodate further credit going forwards.

“This is the real world, the world that we as fund managers have to invest in. That is where the income fund was positioned before the election. I have just over 19 per cent invested in US large-cap equities which are doing very well.

He added: “The portfolio gets more earnings from Europe than it does from the UK and it gets more earnings from the rest of the world than the US.”

However, Woodford has actually increased his exposure to domestic cyclicals over recent months following his positive stance towards the UK economy and how this is likely to impact markets.

Performance of fund vs sector and benchmark over 3yrs

Source: FE Analytics

He said if the Conservatives do form an alliance with the DUP, the administration will have enough seats to function effectively.

“Importantly, this should mean that the ‘hard Brexit’ outcome that the market has most feared becomes less likely,” the manager explained. “In wooing an alliance partner, the Tories will have to offer some concessions and I would imagine the DUP will be keen to secure an open border with Ireland as an important part of those negotiations.

“Membership of the EU customs union could be seen as a minimum requirement if a deal is to be struck with the DUP and, in turn therefore, the probability of a softer Brexit outcome has risen. At the same time, the risk of a second referendum on Scottish independence appears to have substantially diminished.”

While Geffen also pointed out that a second in/out referendum in Scotland is now less likely, he doesn’t believe the election results will deter the prospect of a hard Brexit.

James Dowey, Geffen’s colleague and chief investment officer at Neptune, said: “In our view, and this has always been our view, the binding constraint to soft or hard Brexit does not lie within UK politics but rather lies within priorities of the EU.

“Its number one priority is to avoid setting a precedent for a successful exit from the EU.”

He argued that, while UK exports to the EU as a share of UK GDP is 14 per cent, EU exports to the UK as a share of EU GDP is just 2 per cent. Essentially, he said each EU country is having its trade relationship with one country disrupted while the UK is having its trade with 27 countries disrupted.

“In terms of what we feel the [election] result implies for the likely course of Brexit – we don’t think it changes all that much,” Geffen continued. “It is very difficult for the UK to achieve anything but a hard Brexit given the apparent public will and freedom of movement of labour.”

One view that Geffen and Woodford do share, however, is that there’s no need to make any major changes to their portfolios following the election results. Woodford said the fundamentals of the individual businesses within his portfolios remain very attractive irrespective of last Friday’s events.

“I remain cautious on the outlook for the global economy, but more positive about the prospects for the domestic economy than an increasingly bearish consensus,” the manager concluded. “If anything, with its implications for looser fiscal policy and a softer Brexit, the election result has made me even more optimistic about the UK economic outlook and the portfolios are positioned to benefit from this outcome over the long term.”

Not only has Geffen been increasing his exposure to companies with overseas earnings, he is actively avoiding certain domestic-facing areas of the UK market such as housebuilders and retailers.

Performance of fund vs sector and benchmark over 3yrs

Source: FE Analytics

“Retailers face an enormous structural challenge from the internet and, in most cases, have entirely UK earnings that have perhaps been inflated by a spending spree that is now coming to a grinding halt,” he warned.

“The Neptune Income fund has been positioned I believe correctly for this outlook of falling demand, falling growth and the uncertainty as to which course Brexit will take.

“I continue to be able to provide a strong yield well north of 110 per cent of the FTSE All Share. I am optimistic I will be able to grow the dividend on the fund at least 3-to-5 per cent this year.”

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