Invesco Perpetual's Neil Woodford is positioning his portfolios for a continuing bear market and war...
Invesco Perpetual's Neil Woodford is positioning his portfolios for a continuing bear market and warns pension liabilities will reduce the ability of companies to provide profits to shareholders.
He told delegates at Investment Week's Scottish Markets Forum to expect little recovery in profits or earnings, while low inflation would lead to lower returns on capital and, in turn, lower valuations. He also warned UK dividends will come under pressure.
Woodford said: 'Companies face pensions, healthcare and litigation costs. I think pensions is the most significant of these as they have prior claims on cashflow before it goes to shareholders. Healthcare inflation is high. GE had its first strike in 30 years over attempts to keep it down as a cost.
'Short-term rates are very low but interest costs to highly leveraged companies haven't come down. Look how expensive it is to borrow if you are not a top-rated credit.'
Overall he suggested the US consumer has managed to keep the world economy moving forward by borrowing money and is now over-leveraged, at a time when problems facing corporate America will translate into higher unemployment.
'In the early 1990s the unemployment rate was 8% in the US, so the level of unemployment of 6% at the moment is not good news,' he said. 'The corporate sector is looking to pay down debt so you're not going to see wages and salaries rise. This will affect the way people save and borrow.'
Woodford sees few signs of a corporate renaissance as there is still overcapacity in the US and UK so there is no need for higher capex spend.
Despite this analysis he is confident he can make absolute returns for investors.
He said: 'You can make money in these markets; the question is where. It is not in the largest stocks, which are overvalued and over-analysed. It is in small and mid caps. Free cashflows in mid and small caps are in excess of 10% and this is very attractive compared with base rates below 4%.'
Woodford believes the UK market still undervalues the defensive characteristics of stocks such as utilities and tobacco. He also favours special situations such as biotech and general insurance.
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