Woodford Investment Management has expressed concerns over the UK economy called the present situation “more unbalanced” than ever before and has positioned its investment strategy away from what it calls “the slings and arrows of the UK economy.”
In a statement on its website, Woodford IM, the fund management company set up by popular fund manger Neil Woodford, outlined the reasons for the lob-sided state of the UK economy.
“All the talk of rebalancing the UK economy that we heard from policymakers in the immediate aftermath of the financial crisis unfortunately, has led to nothing,” the statement read. “The UK economy is more unbalanced today than ever before.”
The company pointed to the household savings ratio, house prices and the current account deficit as prime factors for the problems.
It said: “UK households are saving less now than ever before – at least as far back as records go, which is the mid-1960s. The average household currently saves less than 4% of its income each year.”
House prices ‘never fully corrected’
Regarding house prices, Woodford IM states that they were never fully corrected and in the aftermath of the financial crisis, have started to rise again. And with incomes barely growing, the valuation of housing is increasingly stretched. “We don’t think this is sustainable at all,” it stated. “The UK housing market is now very close to the levels it reached just before the financial crisis and as Sir Isaac Newton famously demonstrated, what goes up must come down eventually.”
With the current account deficit also at an all-time extreme, currently representing approximately 5% of UK GDP, Woodford IM said that it is concerned that the UK has a service surplus, but adds that the amount of goods that it imports has never been higher.
“Again, policymakers talked extensively about the need to reduce the UK’s dependence on a few service-based industries and rebuild the economy’s industrial manufacturing and export base,” Woodford IM said. “In the real world, this simply hasn’t happened and UK industrial production is now officially back in recession. The UK economy has been stronger than we had expected in recent years and has been growing at a moderate pace relative to global growth.
‘Something has to give’
“However, this unbalanced progress, if we can call it as such, has been driven by unsustainable forces and an excessive reliance on consumption. Usually, if an economy becomes as unbalanced as this, something has to give.”
Consequently, Woodford IM now expect a weaker outlook for the UK economy – not necessarily a recession but a “period of slower growth”. It pointed that this view isn’t dependent on the outcome of the referendum to stay or exit the EU.
“We continue to believe that the economic implications of Brexit would be largely irrelevant in a longer-term context, as previously argued,” the statement concluded.
“As such, the portfolios are positioned with weaker domestic growth in mind. Our investment strategy is driven by a global perspective rather than a local one. Many of the companies we have invested in have little or nothing to do with the slings and arrows of the UK economy.”