Neil Woodford: a world driven by sentiment

published 3 February 2017

Stocks did extremely well last year but Neil Woodford of Patient Capital Trust is worried the good times may not continue. "Much of what we saw in 2016 does not appear to be grounded in fundamentals", he told Money Marketing it was instead driven by "sentiment and momentum". In particular, Woodford fears investors are overlooking that, in both Britain and the US, budgetary conditions are "constraining" due to "eye-watering" levels of public debt. This limits the scope cutting taxes or raising public spending, something that markets seem to be taking for granted.

Investors also need to consider what's happening in the rest of the world. The rise of populism "could pose an existential threat to the eurozone project". As for emerging economies, these "tend to be more trade-reliant", and so the return of protectionism "could be another headwind for them". A stronger dollar could also be "bad news for the developing world, which is very dependent on dollar liquidity". Alongside "China's deflating credit bubble and slowing economy", these "are all risks to the global outlook that should be considered carefully".

Of course, "it is impossible to determine whether any of these concerns will translate into major problems this year". But Woodford is convinced that "they are too important to ignore". Unfortunately, investors seem to be complacent the FTSE "is not as cheap as it was a few years ago", and so "the prospect of another year of strong market returns looks remote". As a result, says Woodford, investors need "to be selective and on top of the fundamentals of both the global economy and underlying companies".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri