Woodford: “High probability” UK will be downgraded
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Invesco Perpetual’s Neil Woodford believes there is a high probability of the UK seeing its AAA rating downgraded if the government does not address the Budget deficit.
Speaking in a conference call for investors this morning, Woodford said a downgrade by the ratings agencies could lead to serious consequences, including downwards pressure on sterling.
“A downgrade is more likely now than it has ever been, at least since we went cap in hand to the IMF in 1976. There is a decent chance that we will be downgraded, and this is a near certainty if we don’t deal with deficit,” he says.
Britain has to “take its medicine” in order to avert a downgrade, Woodford adds.
“The consequences would be pretty tough as we would end up paying more for our borrowing, and there is the external perception of the economy. Some pressure would be brought to bear on the currency - it has already taken a knock but it could fall further.”
Meanwhile, Woodford has defended his funds’ performance in 2009 following criticism that he missed out on the best growth last year. Saying he preferred to think of performance as a continuum, Woodford said he is confident he will be able to recoup some of the upside he missed.
The manager pointed to unrealistic expectations of economic recovery by the market.
“We were focused on a portfolio of shares that the market decided would underperform in an economic recovery. I am confident we have the right
strategy. We don’t have the right ingredients for a sustainable economic recovery. We are in a period of economic stabilisation. We won’t get a
V-shaped recovery but we won’t fall off a cliff.”
Britain may see one or two negative quarters of growth this year, he adds.
Looking at the prospects for dividends, Woodford says he expects to see dividend growth of 10 per cent this year. “The yield on the fund is currently 4.2 per cent which is over 20 per cent higher than the yield on the stockmarket. It is very healthy compared to the yield you can get on cash or government securities.I expect dividends to grow upwards of 10 per cent this year.”
At the level of valuation, the manager says there are “pockets of overvaluation” in the market but also some areas of extreme undervaluation.
“There is a 13.5 P/E and 3.2 per cent yield average on the market, but 30 per cent profit growth is built into that. So, if you believe what I say, we are lining
ourselves up for a lot of disappointment,” he says.
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Readers' comments (4)
Peter Herd | 8 Jan 2010 12:01 pm
Is interesting to note that most fund managers back in 2007 were predicting interest rates to drop 0.5% because of the problems with the credit crunch. I think it is almost a cert that we are going to have a run on the pound pretty much like we had back in the early 90s with the only weapon that can be used been interest rates. Some funds managers are actually predicting interest rates will rise to 1.5 to 2% by the end of the year. If they do mortgage rates carry on having the same differential between base rate an actual standard variable rate them are going to see an awful lot more pain in the economy as the default rate rises.
Government can not afford to stick its head in the sand and not do something about borrowing as a consequence are clearly going to be painful. I think that we may be at double drop in house prices due to the fact that that if the pound is devalued even further we will see interest rates having to rise meaning a possible collapse in house prices. In the long-term the situation may be saved by inflation as it was in the 1990s and indeed the 1980s. It's interesting to note that the Conservatives are even considering stimulating inflation as a way of getting is all out of debt this would be an extremely risky policy.
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Matt McNamara | 8 Jan 2010 1:25 pm
Performance is a "continuum?" Yes, performance should be analysed on a long-term perspective, but if a so-called star fund manager misses the boat when the markets are charging upwards, something isn't right.
As for the comment about the UK credit rating, that is just bordering on being a platitude. Yes, the deficit is a problem, so where's the news here? The answer is that there isn't any and this is just another talking head expressing an opinion that really isn't worth all that much.
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william meston | 8 Jan 2010 1:50 pm
Remember that Woodford was not taken in by the Technology boom and we all now what happened then !!!-Any sensible IFA will have a few core Income holdings that complement each other ie Inv Perpetual,Neptune,Artemis-One must not be taken in by short term performance-Long term performance and Woodforf is unbeatable
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Paul | 8 Jan 2010 2:26 pm
It's interesiing that markets, politicians and credit rating agencies nearly always focus on budget deficits rather than unfunded/underfunded state and corporate pensions
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