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Neil Woodford: Deleveraging of banks in Europe is ‘5 years behind US’

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Invesco Perpetual’s Neil Woodford

Invesco Perpetual fund manager Neil Woodford believes Europe’s deleveraging process for banks is “five years behind the US” and will inevitably stall economic growth in the region.

In the April update for the Edinburgh Investment Trust, Woodford argues Europe is lagging behind the US having just begun the process of deleveraging.

He says: “The process of deleveraging has only just started in Europe, which is some five years behind the US, and in our view this will inevitably put a brake on economic growth in the region.

“The outlook for the US, where the banks are largely through the required process of deleveraging and bank lending is returning, has improved – but this means it is more likely that quantitative easing may come to an end.”

Woodford points out that while the stockmarket has performed strongly this year, a number of economic challenges facing Europe “have not disappeared”. 

However he goes on to say that some of the recent concerns over events in Europe have “failed to dampen” investors’ appetite for equities.

He says: “Concerns over the rescue of the Cypriot banking system and further disappointing news concerning the UK economy failed to dampen investors’ enthusiasm for equities more than briefly.

”Despite a mid-month fall, the FTSE All-Share index delivered a total return of 1.4 per cent over the month, marking the 10th successive month that the index has delivered positive returns.”

Signs of a recovery coming from the US have also benefitted the trust’s holdings with BAE Systems and Rolls Royce, according to Woodford.

He says: “Strongly positive contributions to portfolio performance over the month also came from BAE Systems and Rolls Royce.

“Both companies have been re-rated by the stock market, from low levels, as fears about the impact of US sequestration have eased.”

Woodford believes that the stockmarket’s rise over the past year in combination with profit downgrades in the more cyclical areas of the market means that currently “valuations no longer look as compellingly cheap”.

As a result of this he adds that the remainder of the year “may see some consolidation”. However, he argues that the trust has the “appropriate strategy” to meet the current environment and remains encouraged by the “stockmarket’s recent appreciation of the qualities of the investment trust’s holdings”.

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