Woodford and Barnett on navigating tough markets
Two of the UK’s most famous fund managers have insisted there are plenty of opportunities for stock pickers despite major challenges ahead.
Making a rare public appearance, Neil Woodford told a room of financial advisers last week that he was more concerned about political risk in Europe than what could happen under a Donald Trump presidency.
He cited the numerous elections across Europe over the coming year including big events in Italy, Germany and France.
‘If investors doubt the sustainability of the euro, it could be quite a moment for the markets,’ said Woodford, who was talking at AJ Bell’s Investival conference on 17 November 2016.
Also appearing at the event was Mark Barnett who manages funds including Invesco UK Equity Income (LU1064479774). He seemed worried a rise in inflation could hit non-discretionary spend although he didn’t believe the UK would end up in recession.
Siding with Clinton
Neil Woodford’s two funds are CF Woodford Equity Income (GB00BLRZQ620) and Woodford Patient Capital Trust (WPCT).
The latter has a bias towards healthcare, a sector that has been hit over the past year as markets worried that Hillary Clinton could impose price caps on drugs had she won the US election.
‘The most attractive valuation opportunities I see are in early stage science-based companies. They are profoundly undervalued,’ said Woodford at Investival. ‘I supported what Clinton said about price gouging. She said innovation should be rewarded and that’s what we are backing (in the Woodford funds).’
Mark Barnett told the audience that global events had resulted in several good investment opportunities from a valuation perspective despite the UK equity market starting to look expensive versus historical levels.
‘Returns (in the UK) this year have been good, largely led by the FTSE 100,’ he commented. ‘We’ve had a fantastic re-rating of the UK equity market over the last five years. If you strip out the dotcom bubble, we are at the upper end of the long-term range (in valuation terms).’
The fact equities are no longer cheap means that stocks are vulnerable to a downwards correction on the slightest bit of bad news.
Earnings growth lags share price growth
One of the most interesting points Barnett made during his presentation was the observation that the equity re-rating over the past five years has not been accompanied by earnings growth.
‘Every year analysts have been too optimistic with their earnings forecasts,’ said Barnett. ‘At the end of the year, the earnings number is a lot less than what was expected at the start of the year.’
He added: ‘I believe earnings should improve this year and a bit more next year.’
His comments echo a theme central to the main feature in Shares this week, namely the first signs of an improvement in corporate profitability.
We believe that shift could prompt investors to begin to favour more cyclical stocks and, in doing so, start to become less interested in stodgy defensive stocks where earnings growth is slower.
Neil Woodford predicts there will be more dividend cuts in the oil sector
Fishing for bargains
Barnett said he had started to take some profit in UK stocks with foreign earnings that had benefited from the weak pound. He’s reinvested the proceeds in UK domestic businesses.
He has identified four companies that should navigate short-term challenges and which are trading at relatively low valuations. Investors with an appetite for risk could benefit from buying at these depressed levels should these stocks eventually see a recovery in earnings.
‘Capita has a fantastic core base of earnings and has de-rated to eight times earnings. The shares have fallen a lot further than the earnings (downgrades) imply. It has been oversold,’ he said.
Elsewhere, Barnett has been buying EasyJet (EZJ). He said the airline had been hit by events outside of its control, namely currency weakness and terrorism.
‘Earnings are under pressure, but this is a best-in-class business which will continue to grow earnings over the next 10 years. You can buy it now on five times earnings and get a decent yield,’ said the fund manager.
He’s also been investing more money in fashion retailer Next (NXT) which issued a profit warning earlier this year. Like EasyJet, Barnett believes Next is a ‘best-in-class business’ which is trading on too low a rating. ‘It is trading on ten times earnings with a 5% yield. That’s too cheap.’
Why Woodford hates banks
Numerous fund managers presenting at the AJ Bell conference said they were buying banking stocks. Woodford has the opposite view, saying they are ‘unappealing investments’.
‘Lots of people are excited about some sort of inflection point in the global economy,’ he said. ‘More inflation, higher bond yields; that expands bank margins. I don’t think Trump can wave a magic wand and deliver higher growth. The market hasn’t thought through what can be achieved.’
Woodford concluded: ‘Life will remain difficult for banks to earn attractive returns.’ (DC)
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