Neil Woodford is ready to gamble on UK domestic shares – but is he right to do so? In a recent note to investors quoted by Money Observer, he claimed that domestic stocks are currently the best investment opportunity of the past 30 years.
That might sound odd, coming off the back of a quarter in which Woodford’s domestic strategy missed some of the stock market’s biggest gains in six years.
Woodford’s own note admitted that the six-year-high quarterly gain made by the UK stock market in Q1 2019 was driven by “large, global dollar-earners, such as the oil majors, mining companies and consumer goods companies”.
So why is he looking to domestic UK stocks instead of these global mega brands in traditionally revenue-generating industries like oil, mining and consumer goods?
US economic pressure
At the time, the US Federal Reserve had just revised its forecast for 2019 from two expected interest rate rises to none – but few analysts had yet predicted that the Fed would actually cut rates in July, counteracting the December 2018 rate hike.
Even so, Woodford pointed to the Fed’s sentiment as a sign that the US economy was losing momentum, but added that UK domestic equities still held promise.
“Valuation is the only reliable predictor of long-term investment returns,” he said, adding that the unfair treatment of UK domestic stocks since the EU Referendum result has led to “a valuation opportunity the likes of which I haven’t seen for more than 30 years”.
Brexit uncertainty in 2018
His comments follow a difficult year for Britain. As the Brexit negotiations took shape, it became increasingly apparent that the UK was unlikely to leave the EU on schedule in March 2019.
Uncertainty is rarely welcome in the financial markets, and the FTSE 100 responded with its worst year in a decade, losing an eighth of its value.
While 12.5% sounds bad enough in itself, that’s equivalent to a staggering £240 billion of value for shareholders, taking the index down from 7,687 at the end of 2017 to 6,728 as the bells chimed to ring in 2019.
But even in the face of uncertainty, the markets tend to rebound as less risk-averse investors capitalise on the opportunities provided by undervalued stocks – so is this set to happen in the domestic market?
Positive performance in 2019
The first quarter was dominated by those global stocks, but that should not distract from the positive performance seen closer to home in the first quarter too.
Woodford’s note read: “During March, we saw better-than-expected economic data in many different parts of the UK economy, including industrial production, unemployment, wage growth and retail sales.”
He added that his managed funds were positioned to take full advantage of any gain in undervalued stocks: “The portfolios are populated with profoundly undervalued companies, many that are exposed to the UK economy.”
But predicting when the bounceback will happen is all part of the alchemy of investing, and Woodford admitted that this doesn’t always look good for outside observers.
“From time to time, markets become detached from valuation reality and while they are, fund managers like me appear to be incapable of delivering good outcomes,” he wrote.
This of course culminated in the LF Woodford Equity Income Fund suspending trading in early June 2019 amid illiquidity concerns – triggered by a fall in the relative value of liquid to illiquid stocks in the fund.
2019 – the bounceback begins?
Woodford may have been an unfortunate victim of bad timing, which was worsened by three of the more liquid stocks in the portfolio suspending trading and driving the ratio past the WEIF’s illiquidity alert threshold.
Had this not happened, it’s likely that the fund – despite losing significant value in recent years – would have stayed within its trading guidelines.
This raises the question of whether British-based stocks are on the brink of the bounceback Woodford has been predicting, at a time when many global stocks are making double digit gains.
Investors who choose to gamble on a British basket will be disappointed if that value doesn’t emerge, especially in a climate of continued Brexit uncertainty.
But equally, those who have followed Woodford in the past could be left ruing the missed opportunity if the UK domestic market surges before the chimes of 2020 ring out.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.