Neil Woodford has sounded a note of caution for investors by warning that economic growth is set to slow and stockmarket volatility will continue throughout the year.
Invesco Perpetual income and high-income fund manager Woodford says the resil-ience of the UK market has surprised him, given recent interest rate rises and macro problems such as the US sub-prime mortgage crisis.
But he says the effect of rate rises is now starting to dampen consumer confidence.
Woodford says: “This evidence of an economic slowdown is pointing to a scenario that I have been anticipating for some time now, which is that as interest rates rise, there will be – with a lag – an effect on consumers’ willingness to borrow and ability to fund rapid growth in spending.”
He says he does not expect a recession but says the benign economic environment enjoyed by domestic and global markets in recent years is set to become more volatile.
He is also concerned that growth in corporate activity and highly leveraged private equity transactions exposes the market to greater shocks by ushering in “a more nervous period for the stockmarket”. This could worsen if borrowers become more stretched.
Woodford says the growing use of agricultural products for alternative fuels such as biomass will put an upward pressure on food prices. This will push up the retail prices index and make interest rate cuts difficult as the monetary policy committee struggles to curb inflation, which could hit the credit markets. He says any correction would provide buying opportunities.
Woodford says: “Over time, risk may well begin to be reappraised and may result in some stocks, which have been progressively undervalued in this recent phase of the stockmarket, regaining their attraction.”