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Woodford downbeat on recovery

The market is too confident that Britain is heading into a V-shaped recovery, according to Neil Woodford, the head of investment at Invesco Perpetual.


The manager of the Income and High Income funds says the market has priced an economic upturn into valuations, but warns recovery may not be so straightforward.

Speaking in a web conference for investors this week, Woodford said: “The market wants to put a positive slant on almost every macro data point, even where companies are disappointing on earnings or having emergency rights issues, that typically, particularly when they are not anticipated, would be taken badly.

“At the moment, because typically those businesses are cyclical, they are perceived to be geared into the V-shaped recovery—which I think now is being priced into the stock market. The market wants to believe that, and wants to
position itself to participate in economic recovery… It’s hard to know
what might break the market’s confidence in that view.”

Woodford said he has been surprised at what has happened to equity valuations in an environment of little concrete evidence of a recovery.

“In the last few days I’ve scanned a number of cyclical stocks and their valuations, and it is astonishing where share prices have taken valuations to, because of course there’s been no recovery in the economy, there’s been no increase in earnings, there’s been no tangible sign of any improvement in profitability for many months now, and as a consequence of that all the share price appreciation you’ve seen is adding valuation premium to these stocks,” he said.

“It is an important point to make, I think, that at the moment albeit I believe there is a lot of opportunity in the market, there is now a lot of risk as well. If I’m right and we don’t get a V-shaped recovery at all, then there’s going to be a lot of disappointment here, and there could be a lot of downside.”

Woodford continues to focus on businesses he perceives as well-financed and good quality, including holdings from the pharmaceutical, tobacco, and utilities sectors.

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On the rebound

Another week and another rally. By the end of last week, UK shares had rebounded by nearly 30 per cent from the March low – and this despite the impending collapse of General Motors. Perhaps of greater importance is the length of the rally. Recoveries of this nature seldom run for more than eight or nine weeks unchecked. This one is heading for a full three months.

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