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The Bigger Picture – Neil Woodford’s macroeconomic views

The Bigger Picture – Neil Woodford’s macroeconomic views

As value-orientated investors searching for the most compelling investment opportunities, we must be prepared to endure tough times, no more so than when markets are momentum driven as they have been for a while now. However, we’ve always believed that fundamentals are all that matter in determining long-term investment returns.

Our investment approach is based on a rational, disciplined analysis of the fundamentals of individual businesses, broader industries and the economies in which they operate. This allows us to make investment decisions based upon the differences between our own perception of the long-term intrinsic value of a company and that of the market which, far too often, tends to be focused on the short-term.

For a while now, our views on market valuations and the broader macroeconomic conditions have gone against the consensus – and that remains the case.

In the months ahead, we expect global liquidity to tighten and China’s economy to begin to slow, with both acting as a brake on economic growth and financial asset prices. Indeed, we are already seeing strong signs that global liquidity has started to tighten as central banks across developed markets, led by the Federal Reserve, are beginning to gradually remove the extraordinary monetary policies that have been in place for many years.

Meanwhile, China’s economy has been an important engine for global growth since the financial crisis and consequently, it has played a pivotal role in setting market sentiment. But times are changing in China and we see a fundamental policy shift underway – from a quantitative growth model that has a GDP target, towards a more qualitative economic policy approach. This is already happening as illustrated by the recent actions of Chinese policymakers aimed at tackling the massive debt problem faced by the country’s economy. However, reducing the huge amount of outstanding debt ultimately means lower future GDP growth – there is no such thing as a painless deleveraging.

Looking at the UK economy, we believe it will continue to defy expectations of a slowdown - the labour market is setting records, inflation is falling and, as a result, we have seen in March 2018 a return to real wage growth in the UK economy for the first time since early last year. Therefore, we believe that the domestic economy’s fundamentals are improving and consequently, we think the UK is in a much better shape than many commentators suggest.

However, what is implied by consensus in equity market valuations is very different than our view – indeed, as a result of the momentum-driven behaviour that has dominated markets for the best part of the last two years, valuations have become very stretched in some parts of the market (US internet stocks, or in the UK, anything which offers investors exposure to Asian growth) and incredibly depressed in others - the healthcare sector has been in a bear market for a long time now, for example, and in the UK, anything domestically-focused is completely out-of-favour. We think this will reverse as the year unfolds.

Consequently, in the current climate, we believe it is more important than ever to focus on the broader issues that drive markets and to pay close attention to business valuations. In the following months, we will follow up with articles on each of these macroeconomic themes – global liquidity, China’s economy and the UK economy – and also on the valuation stretch in markets. In the meantime, should you wish to read more about any of these topics, please visit our website here.

What are the risks?

The value of investments and any income from them may go down as well as up, so you may get back less than you invested

Past performance cannot be relied upon as a guide to future performance

The annual management charge applicable to the funds is charged to capital, so the income of the funds may be higher but capital growth may be restricted or capital may be eroded

Woodford Investment Management Ltd

9400 Garsington Road Oxford OX4 2HN

+44 (0)1865 809 000

info@woodfordfunds.com

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Authorised and regulated by the Financial Conduct Authority

Incorporated in England and Wales, company number 10118169

© 2016 Woodford Investment Management Ltd. All rights reserved

What are the risks?

The value of investments and any income from them may go down as well as up, so you may get back less than you invested

Past performance cannot be relied upon as a guide to future performance

The annual management charge applicable to the funds is charged to capital, so the income of the funds may be higher but capital growth may be restricted or capital may be eroded

The funds may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits

The funds may invest in overseas securities and be exposed to currencies other than pound sterling

The LF Woodford Income Focus Fund will be invested in a concentrated portfolio of securities – the fund is not restricted by reference to any geographical region, sector or market capitalisation

The LF Woodford Equity Income Fund may invest in unquoted securities, which may be less liquid and more difficult to realise than publicly traded securities