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.