Woodford says that the major problems in the economy have not been addressed and that as a result the downturn still has a hell of a way to go.
He says: “Problems with the banking system, consumer economy in terms of leverage, commercial and residential property and excesses seen around the world have still not been addressed in this correction in markets. I believe the ingredients for recovery in this economy are not there and won’t until we see a re-balancing of the global economy, including the US and the UK.”
Woodford says that those who believe this is a V-shaped recovery need to be cautious as a rise of 1,000 points in the FTSE has meant that in addition to opportunity there is now a lot of risk.
He says much of the value has now been priced in and maintains he will not buy into a cyclicals rally despite it being difficult to see what will break market confidence.
‘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 has been no recovery in the economy, there’s been no increase in earnings and there’s been no tangible sign on any improvement in profitability for many months.’
Instead he prefers some of the defensive stocks, such as utilities, pharmaceuticals and tobacco as well as pointing to companies like Tesco and Capita.
He says: “The opportunities are in the businesses best positioned to deal with what will be a difficult market for years to come. Those companies will be non-cyclicals, well financed with an international focus, good profits and cash flow diversity.
“’I find myself feeling strangely back in the sort of environment that I was in 10 years ago when I saw the opportunity in the market in stocks that the market hated because they were old economy stocks.
“Rolling on 10 years I find that we are in a similar, but for very different circumstances, polarised market where the businesses I see an opportunity in have profoundly undervalued share prices, but are the businesses where I see the greatest upside.”