Invesco Perpetual manager Neil Woodford has warned investors that Europe is facing a credit crunch, which will drag the UK into recession. Woodford, one of the UK’s leading money managers, normally shies away from making dramatic macro calls and sticks to analysing sectors and companies. However, in a recent interview with Investment Week, he predicted a “messy Greek default and exit from the euro”.
Woodford believes that the package created by European politicians to solve the crisis is “substantially short” of what’s needed. As a result, banks are now trying to raise capital, causing a squeeze on credit.
“I am getting increasingly worried about the European growth outlook as a result, and the increasing intensity of the crisis – its likely implications on banks and bank credits – that is where the fault line manifests itself.”
Woodford doesn’t expect the politicians to ride to the rescue either. “There are things that maybe [Angela] Merkel and [Nicolas] Sarkozy cannot control. The risk of something unpleasant happening quite soon has increased significantly.” As a result, he expects “the eurozone to be in recession next year and the UK could follow suit”.
Woodford’s strategy to overcome the risks? Do nothing. Woodford is refusing to make changes to his Invesco Perpetual High Income and Income funds. “”The economic uncertainty is creating massive volatility. It is very difficult for any manager to hedge out the risk in equities. We have to embrace the risk in the asset class in the near term.”
His confidence may well stem from the recent vindication of his value investing approach. Both funds, which manage total investments of almost £20bn, performed poorly in the first half of 2011, and Woodford came under fire from some quarters.
Yet, he stuck with value investing and the funds recovered to become top performers in the equity income bracket. As a result, he is sticking with large defensive firms that he thinks can weather the economic turmoil. In particular, he is keen on the pharmaceutical sector and recently upped his holdings in Swiss drugmaker Roche.